Special purpose acquisition companies (SPACs) are publicly traded companies that raise a blind pool capital through an IPO (initial public offering) for the goal of acquiring an existing company. The money the SPAC raises through the IPO is kept in a trust until the SPAC identifies an acquisition or merger opportunity to proceed with the invested or raised funds. The shares of an SPAC are usually sold in relatively inexpensive units and include one share of common stock. These shares also include a warrant allowing the right to buy additional or partial shares.
Understanding the SPAC
In a broader sense, SPACs are a part of vast acquisitions and mergers market. Public and private companies can use them as a tool to buy an acquisition target. As an initial public offering in the stock market, they require a perfect planning cycle that’s usually led by an underwriter, mostly an investment bank.
Structuring of an SPAC
An SPAC is usually formed with the capital raised through an IPO. As a publicly traded stock, an SPAC is held to the same market issuance standards. However, the offering of an SPAC has its unique characteristics.
The founders of the SPAC could have different characteristics. However, they’re either private or public asset managers. A particular public company might be interested in the SPAC’s IPO for the sole purpose of acquiring a complementary firm in its industry.
Private asset managers could choose SPAC offerings as a part of an extensive portfolio management strategy. Generally, the founders have one or several targets in mind when forming an SPAC. Yet, the common purpose of all founders is the same – raising funds for the goal of acquisition.
To begin the planning process of SPAC, founders turn to an investment bank for managing the IPO. The bank charges a service fee of around 10 percent of the IPO proceeds. The selected investment bank leads the process, and this involves structuring the terms of capital raising, preparing and filing of IPO documentation, and pre-marketing the IPO offering to interested investors. As with any other IPO, the bank can also have an interest in the IPO or offer incentive capital on the basis of IPO performance.
The capital or funds raised through the IPO are deposited and held in a trust account. Underwriting fees and other expenses are borne by the founders. Once the SPAC offering is complete, the management team has about 24 months to identify the target and complete the process of acquisition.
If a deal is made, the management and shareholders of SPAC services make a profit by means of the ownership of the common stock as well as any warrants. Additionally, shareholders are allotted equity ownership through the transformation process in the new company. In case the process of acquisition isn’t completed within the required time period, the SPAC gets automatically dissolved and the money kept in the trust is returned to the investors.
An SPAC can be considered as an IPO of a limited company to be named at a later date. It’s a shell or blank check company that raises money through its initial public offering for acquiring a target company and then seeks a company to purchase. However, there are differences of opinions and views on SPACs.
Critics argue that such companies are nothing more than fee generating vehicles for investment banks. Also, they state that the risks are transferred onto investors. However, supporters of SPACs have a completely different opinion. According to them, special purpose acquisition companies serve a very important function in advancing newer technologies and businesses, especially in emerging markets.