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SPAC – Special Purpose Acquisition Company

Home/Glossary/S/SPAC – Special Purpose Acquisition Company

What Is A SPAC Stock or Special Purpose Acquisition Company?

A SPAC stock or Special Purpose Acquisition Company is a shell company.  That is, the organization does not have an operating business.  Instead, a SPAC will raise money through a public offering on the NASDAQ or NYSE and the management team will then seek a company to purchase.  Think of it as a SPAC IPO.

During the early 1990s, investment banker David Nussbaum and securities attorney David Miller came up with this structure.  The reason was to find a way to avoid the legal prohibition against shell companies.

How a SPAC Works

Until April, the SPAC market was one of the hottest corners on Wall Street.  But things have since cooled down.  This is partly due to the sell-off in growth stocks.  But there are also signs that the Securities and Exchange Commission may impose more restrictions on the market.

OK then, so how does a SPAC work?  The management team – which is also called the sponsor – will invest a small amount of capital for roughly 20 interest in the equity.  The rest will be held by the public and be composed of a unit that includes a share of common stock and warrant to purchase more stock in the new entity (the strike price is usually $11.50).

With the acquisition, at least 80% of the escrowed proceeds must be used.  The general rule of thumb is that the valuation should be two to four times this amount.

The management team usually has two years to make an acquisition, which requires shareholder approval.  And if a deal is not struck, the SPAC will be liquidated and the proceeds returned to the investors.

A SPAC can acquire more than one company but this is rare because of the complexities.

Traditional IPO vs SPAC IPO

While an IPO is for an operating company, the SPAC is for a shell.  The traditional IPO also usually does not come with a warrant and there is no requirement to make an acquisition.

Then why invest in a SPAC?  A key reason is that there is downside protection.  Again, if a deal is not completed, the investors will get their money back.

List of SPACs stocks

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SPAC

Description

Pershing Square Tontine Holdings Ltd (NYSE:PSTH) The CEO of this SPAC is Bill Ackman, who is one of the world’s top hedge fund managers.  He has raised $4 billion and is looking for a “mature unicorn.”

 

Social Capital Hedosophia IV (NYSE:IPOD) This is led by Ian Osborne and Chamath Palihapitiya, who is a top Silicon Valley venture capitalist and a former executive at Facebook (NASDAQ:FB).  They raised $400 million for this SPAC.

 

Apollo Strategic Growth Capital (NYSE:APSG) This SPAC is backed by one of the world’s largest private equity firms, Apollo.  The firm was able to raise $850 million.

Special Purpose Acquisition Company Pros & Cons

When it comes to making a SPAC investment, here are some of the main advantages:

  • The warrant can allow for additional upside if the SPAC is successful.
  • It’s common for this type of investment to focus on earlier-stage opportunities, such as with EVs (Electronic Vehicles), Artificial Intelligence, and so on.
  • An investor has a redemption right if they do not agree with the acquisition.

As for the disadvantages:

  • There has been a glut of new deals on the market, which has weighed on valuations.
  • The management team of a SPAC may be pressured to complete an acquisition, even if the deal is not particularly attractive.
  • There is regulatory uncertainty.