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Three questions and answers about the SPAC boom

ICYMI, Tiger Woods is raising $150 million by launching a sports-focused ‘SPAC’ in the wellness sector. “What is a SPAC?” you may ask.

 

SPAC is short for ‘special purpose acquisition company’. These companies are backed by high-profile investors or are affiliated with celebs to help attract attention. Jay-Z Carter, Shaquille O’Neal, Leonardo DiCaprio, Donald Trump, Serena Williams are a few to name. Regardless of their minimal investing experience, celebrities have helped popularise such once-obscure investments.

 

This preferred method of taking companies public means faster execution, lower costs, and narrower regulatory oversight for the investors. For the rich and recognised, it’s a new way to flex their status and wealth and monetise their reputation. 

 

SPACs have been around in their current form since the 1990s, but they were previously associated with frauds and scams. Now, SPACs are considered to be really quite cool, especially after having taken off during the pandemic.

Three questions and answers about the SPAC boom

How does a SPAC work?

Rather than go public through its own IPO, a private company opts to debut on stock exchanges via a SPAC. A SPAC raises capital through an Initial Public Offering (IPO) to acquire an existing operating company. 

 

A SPAC, also known as a “blank check company”, is an entity with no commercial operations, existing specifically to complete an IPO to take an acquired company public. 

 

Before the SPAC has bought a company, its funds are typically invested in government bonds.

 

Investors who support a SPAC in its pre-IPO stage are called sponsors. The sponsors typically have two years to identify acquisitions or return their investors’ money. 

 

Investors who want to gain exposure to startups in red-hot sectors love SPACs. The key to benefitting from such an acquisition as an investor is putting money into the shell company while still searching for a deal. 

Are SPACs successful investments?

In the States, 59 SPACs were formed in 2019. In 2020, that number rose to 248, while 2021 saw 613 SPAC listings.

 

In 2021, 21 out of 33 celebrity-tied SPACs have posted negative returns. Many SPACs lose money after finding a company to acquire, especially in the year following a merger.

 

The regulatory authorities caution investors about putting money into special purpose acquisition companies associated with celebrities. 

 

However, a handful of SPACs performed really well over the last two years. Several notable companies went public through SPACs, including Virgin Galactic, DraftKings Inc, Iridium Communications Inc and MP Materials Corp.

 

SPACs tend to be risky investments, so they’re generally inappropriate for conservative investors.

Why do so many companies choose SPACs over IPOs?

SPAC is a popular way to go public because of its efficiency, fast execution and far lower cost. 

 

A blank-check company has no operations, no debt, no liabilities and almost no assets. Thus it takes less time – 3 to 6 months – to complete the regulatory steps involved with an IPO process – 12-18 months. Also, the advisory fees and the legal costs are significantly lower than those charged for traditional IPOs. 

 

However, the main challenge of going public with a SPAC merger over an IPO is that the SPAC process does not require the rigorous due diligence of a traditional IPO. This could lead to incorrectly valued businesses resulting from well-hidden weaknesses of a company.

 

Are you interested in adding SPACs to your trading portfolio? If the answer is yes, discover SPAC stocks to trade as CFDs among Eurotrader’s products

Disclaimer: Eurotrader doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice.

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