Playbook #035: SPACs (Special Purpose Acquisition Company)
🖼️ The Big Picture
What do hot newly public companies like Draftkings, Virgin Galactic, and Opendoor Technologies have in common?
They didn’t go the traditional Initial Public Offering (IPO) route, which can take 6 months to more than a year to complete, and can be extremely complicated and expensive. Instead, they were acquired, or merged, with a SPAC (Special Purpose Acquisition Company).
SPACs are also known as “blank check companies.” That's because the SEC gives them a window of time to raise funds without performing any business operation other than seeking out a potential company to buy out and merge with. They are an interesting investment tool that have been around for a while, but have skyrocketed in popularity the last couple of years. Basically, they’re a shell company that raises money through an IPO, usually at $10 a share.
As mentioned, SPACs have no business operations or purpose, except to acquire or merge with a private company within a 2 year time frame - thereby bringing that company public.
While founders of the SPAC may have an idea of companies they’d like to target — usually concentrated in the tech, electric vehicle, or sustainable energy industries — they don’t disclose these ideas to investors upfront, in order to avoid extensive disclosures.
The entire idea is to make going public faster, cheaper, and easier for private companies. And if the SPAC has a strong team of founding investors, they’re able to provide additional leadership and advisors for the company they merge with, making it even more attractive. Private companies may also be able to negotiate better terms, knowing that the SPAC must utilize their funds within 2 years, or else return the funds to their investors.
As for everyday retail investors, IPOs aren’t offered in all brokerage accounts, so SPACs give you an opportunity to get in on the ground floor of potentially exciting new companies. Of course, you’re putting your faith in the leaders of the SPAC, so it’s critical you research the SPAC team, as well as the company being targeted for acquisition if that information has been made available.