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What are SPACs and Why Should you invest in them

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what are SPACs

For many company founders and investors, one of the many important milestones to know whether you have  made it is going public. Going public is a means to further expand one’s company by allowing the public to trade in its stocks and own stakes in that company. By going public, companies communicate to the general public and interested investors that it is a trusted brand worthy of investment. In doing so, raising capital becomes easier and  many other avenues for profit, such as expanding and acquiring assets become available. 

Companies usually go public through making an IPO or an initial public offering. This means that they will  be selling shares of their company to the public for a price. This allows investors from different parts of the  globe and different backgrounds to buy and sell their stock in the company based on that company’s value. But there are many downsides to going public. For one, the financial market isn’t always as excited to cash  in on IPOs. Especially during recessions or when the economy is down, investors do not exactly have the  best appetite for taking on risks. There are also a number of limitations restricting how early and how much  of their shares company founders can sell. 

Many companies, in order to escape many of the negative sides of going public, prefer to go a different  route: selling their companies to a special purpose acquisition company (SPAC). Because many companies  are opting for this choice instead, more and more SPACs are popping up, and many investors are getting in  on this trend. 

For a person looking to invest, however, putting money in a SPAC may be a promising new venture to earn  profits. If you are one of the people currently asking, “What is SPAC?” Or, “Should I invest in SPAC?” This  article will go over questions about SPAC investing, as well as give you an overview of SPAC trends. 

What are SPACs? 

Special purpose acquisition companies (SPACs) are not like other companies. They essentially have zero  commercial operations of which to speak. They do not make or sell products or do most of the things regular  companies do. 

SPACs exist for only one thing: to buy private companies for the purpose of making those companies public.  Like what was said earlier, there are many downsides to going public through an IPO. SPAC IPOs are where SPACs basically go through the gruelling IPO process so other companies don’t have to do so. 

In return, the SPAC founders and the SPAC investors in SPAC earn money from the size of the stake they  have in the company they purchased. The goal of a SPAC is to find the best company to buy and the best  deal they can find. In order to do so, it enlists a SPAC management team. Otherwise, if they do not find a  company to buy within a specific period, the capital the investors put in would revert back to its shareholders. 

The SPAC does not usually state what kind of company it wants to buy. That’s why it’s often called a “blank  check company.” The SPAC relies on the reputation and expertise of its founders to attract investors, with  the promise that you will get a good share once the SPAC finds a good company to buy. 

How SPACs Work? 

First, let’s clarify some terms to avoid confusion. The SPAC founders are those who invested a large amount  of capital to form the SPAC company and make it go public through an IPO. The SPAC investors are those  who bought stock in the company, either before or after the company goes public. The SPAC managing  team is the team in charge of finding a profitable company to buy. 

Now, then. A SPAC starts with the initial investment of its founders. The founders of the SPAC put in  enough capital to make an IPO. They then make a contract with a trusted investment bank to manage the  IPO for the SPAC, usually in exchange for a portion of the IPO profits. The proceeds from the securities  sold during the IPO, which were bought at a unit price representing at least one share of the common stock,  are then placed in a trust account. The proceeds will be held there until such time that the SPAC finds a company to acquire. 

SPAC Gainers and Losers

After going public, the SPAC management team has a year and a half to two years to find a company and  complete the process of buying it. This process is actually called as SPAC Merger. The deadline depends on what kind of industry the SPAC management  team is looking into. A crucial component of whether the SPAC will buy a specific company is if its fair  market value is worth usually at least 80% of the proceeds of the IPO currently held in trust. 

Once they have found a worthy acquisition and buys that company, the SPAC founders will profit from the  transaction with at least ? of the common stock. Meanwhile, the investors will get an equity interest based on  their investment. However, if the SPAC management team fails to find a worthy company within the  deadline, then the investors would receive back the IPO proceeds inside the trust account. As an incentive to  find a deal and meet the deadline, the SPAC managing team is prohibited from receiving salaries and  commissions until the completion of the purchase. 

Why Should You Invest in SPAC? 

As an investor, you’re banking on the ability of these founders to find a deal that would net you the most  amount of money from the acquisition. SPAC founders are usually business titans whose experience and reputation would most probably lead them to find and purchase a large profitable company. 

But while it seems that you’re gambling based on another person’s ability to close a deal, it’s less risky than  that. Like we already mentioned, the SPAC managing team must identify a viable company for the purchase  and complete the buying process in at most two years. Otherwise, the IPO proceeds will go back to you. You  will either profit from the successful purchase of the company or get your money back. Not a lot of  investments can promise that. 

A lot of companies also want to be purchased by SPACs. Aside from having a faster means of going public,  it also is more profitable selling a company to a SPAC than through a regular private equity transaction. It  also makes the process of going public less risky for that company. Thus, it isn’t a matter of whether your  SPAC management team will find a good company to buy, it’s whether they can find the best one before the  other SPACs. Either way, the possibility to grow your investment is there. 

SPAC Trends in the Market 

SPACs have been around for decades, but they have experienced a meteoric rise in the last three years. In  fact, Deutsche Bank, Goldman Sachs, and Credit Suisse, among the world’s largest financial institutions,  have begun underwriting for SPACs. This is only one of among many SPAC trends that spell out the future  of these companies. 

SPAC Trends in Market - SPAC News

In 2019, SPACs have broken the record in the amount of IPO money they raised by luring in big-name  investors and underwriters. Fundraising in SPAC IPOs, from $3.2 Billion in 2016, hit a record of almost $14  Billion in 2019. Virgin Galactic, owned by billionaire Richard Tycoon, went public when 59% of its stock  was purchased by Social Capital Hedosophia Holdings, a SPAC owned by Chamath Palihapitiya, a venture  capitalist. 

In 2020, more than 50 SPACs were formed in the US alone, raising upwards of $20 Billion in value. The  SPAC Pershing Square Tontine Holdings alone raised $4 Billion in its IPO. This SPAC was founded and  sponsored by Pershing Square Capital Management founder, Bill Ackman. From NBA legend Shaquille O’Neal to executives from successful sports and media brands, prominent figures from different industries  are looking to cash in through sponsoring and founding their own SPACs and have said yes to the question,  “Should I invest in SPACs?” 

However, there are also risks in investing in SPACs. In general, SPAC individual investors have low levels  of profit due to many SPACs underperforming in the stock market and falling below the price of its IPO.  The least-risky way of generating profits from SPAC investment is investing before it goes public. After  that, SPAC investing becomes a matter of researching which SPACs are more successful and well-managed than others..

Final Words 

From a company’s perspective, an acquisition by a SPAC is a means to accelerate its growth and expand the  base of its investors without many of the hassles attached to going public through an IPO. But for individual  investors, it is a way to earn money by relying on the instincts and acumen of tried and tested venture capitalists and industry mainstays. 

To make it easy for you to find SPAC IPOs and various other useful information, we introduced SPACrun. Be the first one to know about breaking mergers and definitive agreements with premium SMS/email alerts. Sign-up for free today!

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