SPAC
Tue, Apr 15A SPAC, or Special Purpose Acquisition Company, is a shell entity established specifically to merge with a private company, allowing that company to go public more swiftly than through a traditional initial public offering (IPO) process.
SPAC is an acronym for “special purpose acquisition company.” It is also referred to as a “blank-check company” or “shell company.” These shell companies go public to raise funds with the exclusive aim of acquiring a promising private company that has significant growth potential, thereby facilitating its public listing.
Investors place their bets on the management team to fulfill their commitment to identify a compelling target and take it public through a merger.
When a sponsor or management team decides to initiate a SPAC, they establish a holding company. The sponsor then seeks investors by promoting their expertise in deal-making and the specific industry in which they plan to find a company to acquire.
Once sufficient interest from external investors is garnered, the sponsor sells units in the SPAC. Typically, SPACs go public at a unit price of $10. These units usually consist of one share and a fraction of a warrant.
The funds raised are placed in a blind trust, which cannot be accessed until shareholders approve an acquisition. The SPAC is traded on an exchange like any other publicly listed stock.
SPAC sponsors have a timeframe of 18 to 24 months to finalize a deal, as outlined in the prospectus. They are incentivized to complete a transaction, as they receive approximately 20% of the shares outstanding at the IPO. These shares, known as “Founder Shares” or the “promote,” serve as compensation for securing a deal.
If sponsors do not complete a deal within the specified period, the SPAC will dissolve, and shareholders will receive their investment back.
Once a target is identified and acquisition terms are negotiated, shareholders vote on whether to approve the deal. If approved, the sponsor proceeds with taking the company public, contingent on regulatory approval and the SPAC having sufficient capital for the acquisition. At this stage, shareholders can choose to redeem their investment along with interest.
If additional funds are required, sponsors may seek private investors for a “PIPE” transaction (Private Investment in Public Equity). Notable firms like Blackrock, Fidelity, and T. Rowe Price have participated as PIPE investors.
After approval, the SPAC’s ticker symbol changes to reflect the newly acquired company, and shareholders who held stakes in the SPAC now own shares in the newly public entity.
Although SPACs have existed for decades, they are not as widely recognized as traditional IPOs. Traditional IPOs cater to more established companies with private investors seeking exits, while SPACs focus on companies in the earlier stages of their growth, offering even greater upside potential than IPOs.
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