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Special Purpose Acquisition Company SPAC How It Works

what is a spac and how does it work

SPACs were once a little-known way for private companies to go public without having to IPO. Returns from SPACs may not meet expectations offered during the promotion stage. Strategists at Goldman Sachs noted in September 2021 that of the 172 SPACs that had closed a deal since the start of 2020, the median SPAC had outperformed the Russell 3000 index from its IPO to deal announcement. However, six months after deal closure, the median SPAC had underperformed the Russell 3000 index by 42 percentage points. With our extensive network and resilient connections across the investment industry, we make sure that your SPAC will indeed be successful. We at SPAC Consultants provide substantial added value to SPAC projects that you will not get from most others in the SPAC space.

A special purpose acquisition company (SPAC) is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). Such a business structure allows investors to contribute money towards a fund, which is then used to acquire one or more unspecified businesses to be identified after the IPO. Therefore, this sort of shell firm structure is often called a “blank-check company” in popular media.

what is a spac and how does it work

Therefore, a SPAC doesn’t conduct any business, does not sell anything and typically only holds the money raised in its own IPO. SPACs have a specific time frame in which they need to merge with another company and close a deal. If a SPAC cannot merge during the allotted time, then it liquidates and all funds are returned to investors. Richard Branson’s Virgin Galactic was a high-profile deal involving special purpose acquisition companies. Venture capitalist Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million before listing the company in 2019. One risk to investing in a SPAC is that even if they identify a company to acquire, the deal may not end up going through.

A SPAC is formed by a management team, typically known as a sponsor, that often has a business background, usually with a specific skillset in a niche industry. They initially pony up a nominal amount of investor capital – usually as little as $25,000 – for which they will receive “founder shares” that often equate to a 20% interest in the SPAC. Once the IPO raises capital (SPAC IPOs are usually priced at $10 a share) that money goes into an interest-bearing trust account until the SPAC’s founders or management team finds a private company looking to go public through an acquisition. After the IPO, the units become separable into shares of common stock and warrants, which can be traded in the public market. The purpose of the warrant is to provide investors with additional compensation for investing in the SPAC.

MD&A disclosures usually require extensive data analysis and generally contain sensitive financial and operating information. Once shareholders approve the SPAC merger and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity. Special purpose acquisition companies, or SPACs, have been around in various forms for decades, but during the past two years they’ve taken off in the United States.

Special Purpose Acquisition Company: What Is A SPAC?

Further, given the compressed timeline of a SPAC merger, project management is essential in order to reduce execution costs, increase project efficiencies, and provide working group participants with enhanced accountability and transparency. That’s because when a SPAC raises money, the people buying into the IPO do not know what the eventual acquisition target company will be. Institutional investors with track records of success can more easily convince people to invest in the unknown.

what is a spac and how does it work

Otherwise the SPAC is liquidated and investors get their money back with interest. Once the SPAC management team has its treasure trove of cash, it can start hunting for deals, and it has a limited time to do so. Consumers don’t know at the end of the day what the SPAC is going to do, so in reality, they’re betting on the SPAC sponsors when they invest. There’s not much risk, outside of opportunity cost, to investing in a SPAC.

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After initially rising to around $100 per share after the deal was announced in the spring of 2022, DWAC shares were trading sharply lower at just around $18 toward the end of 2022. The route to public offering using a SPAC may take a few months, while a conventional IPO process can take anywhere from six months to more than a year. By submitting your email address, you acknowledge that you have read the Privacy Statement and that you consent to our processing data in accordance with the Privacy Statement (including international transfers). If you change your mind at any time about wishing to receive the information from us, you can send us an email message using the Contact Us page.

  1. It charges 0.95% annually, or $95 for every $10,000 invested – a high expense for an ETF, but you’re paying for a human hand to steer the ship.
  2. Blank-check companies have even caught the eye of the SEC, which has become more verbal on the subject in recent months.
  3. Consumers don’t know at the end of the day what the SPAC is going to do, so in reality, they’re betting on the SPAC sponsors when they invest.
  4. “SPACs could generate more than $700 billion in acquisition activity in the next two years.”
  5. The target company must prepare a MD&A disclosure for all periods presented in the financial statements so that investors understand the target company’s financial condition and results of operation.

Now just like any startup, the SPAC management team needs to put up some money in order to get that eventual payoff. That money is referred to as the “risk capital.” This capital funds the SPAC from its inception until its eventual merger with a private business. The units sold to the public comprise a fraction of a warrant, which allows the investors to purchase a whole share of common stock. Depending on the bank issuing the IPO and the size of the SPAC, one warrant may be excisable for a fraction of a share (either half, one-third or two-thirds) or a full share of stock.

Should You Invest in a SPAC?

SPACs continue to gain popularity as a potential liquidity option for many companies. The SPAC merger process with a target company may be completed in as little as three to four months, which is substantially shorter than a typical traditional IPO timeline. Accordingly, a target company must accelerate public company readiness well in advance of any SPAC merger.

Morgan online investing is the easy, smart and low-cost way to invest online. Work with a team of fiduciary advisors who will create a personalized financial plan, match you to expert-built portfolios and provide ongoing advice via video or phone. But if an investment you’re considering has run to ludicrous valuations, don’t feel compelled to chase – there’s seemingly always another SPAC opportunity waiting right around the corner.

What Is a SPAC?

At that point, the entity usually is no longer known by the SPAC moniker, but by the name of the acquired company. As with any investment decision, there are pros and cons to investing in a SPAC. Investing in a SPAC amounts to a bet on the sponsors, their reputation and whether a successful deal will happen within two years. Rather than researching a company’s financials, as you should when investing in an individual stock, you’ll need to instead research who is behind the SPAC and what industry they may be targeting for an acquisition.

For instance, on March 1, Rocket Lab agreed to merge with blank-check firm Vector Acquisition (VACQ). The company will trade as RKLB after the deal’s close, which was expected to happen during the second quarter. That’s why you might opt for a SPAC-focused ETF if you’re dead set on SPACs or want to add them to your portfolio for diversification.

How Does a Special Purpose Acquisition Company (SPAC) Work?

If the target company is determined to be the accounting acquirer, the transaction will be treated similar to a capital raising event (i.e., a reverse recapitalization). If the SPAC is determined to be the accounting acquirer, purchase accounting will apply and the target company’s assets and liabilities will require a valuation to be stepped-up to fair value (i.e., a forward merger). The deal itself is known as a “reverse merger.” This is a term outside of the SPAC world, too. If a public company isn’t doing so well, for example, a private company could take over, using the public entity to enter the market.

As an investment option they have improved dramatically, especially over the past year, but the market remains volatile. More changes are sure to come, which means that sponsors, investors, and targets must keep informed and vigilant. It is simply a guide for businesspeople considering a move into this rapidly evolving (and for many, unfamiliar) territory. Once it goes public, the SPAC typically has between 18 and 24 months to seek out a “target company” and negotiate a buyout. If it does so, it usually will change its ticker to reflect the new entity it has merged with, and shareholders will now be invested in the acquired company. SPACs are a way for companies to make the leap from privately held to publicly traded in a way that’s often less complicated than an initial public offering (IPO), according to Peter McNally, global sector lead at Third Bridge, a research firm.

It is also called “de-SPACing”, as the Special Purpose Acquisition Company is not a SPAC anymore. The necessary sponsor capital is generally in the range of 7.0 to 7.5% of the planned IPO size, but may vary in accordance with each SPAC. Get more from a personalized relationship with a dedicated banker to help you manage your everyday banking needs and a J.P. Morgan Private Client Advisor who will help develop a personalized investment strategy to meet your evolving needs. Easily research, trade and manage your investments online all conveniently on and on the Chase Mobile app®.

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