Special Purpose Acquisition Company (SPAC)

Forming a Special Purpose Acquisition company is a very common strategy nowadays. It’s a practice that’s been around a long time and that can bring many benefits for all the parties involved. Read on so you find out more about it. Who knows? You may develop quite the interest when you’re done.

What Is a Special Purpose Acquisition Company?

A Special Purpose Acquisition Company (SPAC) is a business that was formed with only one goal in mind: to increase capital. It has no commercial operations and it originates from an initial public offering to acquire a company that already exists.

SPACs are also known as blank check companies, and they’ve existed since the 90s. A company like that is often launched by one or more sponsors. Currently, many people – from Wall Street professionals to important CEOs have felt interested in those companies and decided to start their own.

Why Are SPACs so Popular?

Although SPACs have been around for decades, and their popularity seems to consistently increase with the passage of time. Initially, their purpose largely revolved around helping small companies. Now, things have changed.

The market became extremely volatile. Consequently, many people wanted to raise their capital and stabilize their finances.

Fortunately, SPACs work perfectly for that purpose. Therefore, business owners chose to merge their IPOs with a SPAC and get a quick capital influx.

How Do They Work?

A SPAC doesn’t have any business operations when it starts, and its assets are nothing other than cash. These firms often go through three phases, which are as follows.

1. Incorporation

In the first phase, the company must incorporate different people to create a basis for what comes next. Thus, it starts by finding founder shares and issuing them.

After that, the company must also prepare its S-1. That’s a very specific form that needs to be filed before the IPOs. The whole process of the first phase lasts around eight weeks to several months.

2. Research

The second phase is one of the most important ones because it involves several processes. On one hand, companies need to file SECs regularly, sign agreements, and more.

However, a crucial part of the second phrase is identifying target businesses. Since the goal is to raise capital, it’s very important to determine precise opportunities to arrange assets or mergers. The whole process can last up to 19 months.

3. Acquisition

Once the agreements have been signed, the third phase can start. The first part of it consists of making public announcements regarding the acquisition.

Then, the company must meet with different investors to talk about transactions. After that, it’s the moment to obtain the approval of shareholders, renegotiate, or find go back to the search for a target.

The last part of the third phase includes closing the transaction and filing the Super 8-K. Overall, the process can take between three and five months.

As you can see, having a Special Purpose Acquisition Company is not something you can achieve overnight. You need to go through three defined stages and involve other people, including shareholders. There might be setbacks in the process as well, so be prepared to spend up to two years to achieve your objective.

Risks of SPACs

SPACs have become so popular that likely they’re going to remain as a strong option for a long time. However, it doesn’t mean that they don’t have risks.

The first risk you have if you want a SPAC is that shareholders might not approve it. If that happens, regardless of how much you’ve worked to make the deal happen, it might not occur.

At the same time, you risk having shareholders that want to redeem a tremendous number of units. In some instances, they might not want to change units for stocks but keep the cash.

If that happens, your company risks not having enough cash to close the new deal. In that case, the process might also have many issues. Another possibility is that the company no longer meets the shareholder number requirements needed for the deal to be completed.

Finally, shareholders might want to have special perks when the deal is complete. If that starts happening, the target company needs to negotiate to determine all kinds of details, for example, whether the management team is going to remain the same or not.

Advantages

A SPAC can bring many benefits for both investors and targets. Since it uses a process designed to help all the parties, the purpose is to raise the company’s capital by making agreements that work for everyone.

In the case of investors, SPACs can benefit from tradable warrants and stocks. For example, when they wait for a good target company, they can trade their assets. When the deal is announced, the investors could sell their shares and get good returns.

Although investors can work with a venture capital pool, investing in a SPAC means that the biggest investors can put in the money themselves. They don’t choose the deals, but they can decide to step out of one if they believe it’s not worth it. Thus, the greatest advantage you get if you’re an investor is that you get the power to have a say.

Where targets are concerned, SPACs are much cheaper and quicker than other options. It also tends to have cash in the mix, which is convenient because it allows business people to make a capital appreciation immediately.

With the necessary arrangements, targets can choose to keep one or more management members after the merge. However, that needs to be discussed when making the deal so all the parties are satisfied.

Key Takeaways

SPACs started in the 90s in the United States as a last alternative to help small businesses. However, in a plummeting economy, they are one of the most popular ways to raise capital.

Although they require a long, defined process, they can bring benefits for both investors and targets. Thus, they’re a great option to turn a company around and increase capital immediately.