A Special Purpose Acquisition Company (SPAC) is a way for a private company to go public other than a traditional IPO. SPAC has become popular in recent years due to its advantages over traditional IPO. Private companies that want to go public consider SPACs as they are faster and easier. In this article, we will walk through SPACs and their working principle.
What are SPACs?
SPACs are shell companies whose main aim is to acquire a private company. SPACs are founded and managed by veteran business tycoons. This is one of the reasons why SPACs are so successful. These SPACs only focus on the private companies that meet their expertise. Once a SPAC company has filed an S-4 filing on the Securities and Exchange Commission (SEC), they will open SPAC IPO to the public. Generally, SPAC IPO offers SPAC units to the public. A unit consists of a stock and a fraction of a warrant. All the units are listed on stock exchange platforms for trading. The company must satisfy all the listing requirements of the stock exchange platform. Once listed, it will have a unique ticker symbol with which they are traded.
A SPAC warrant is an option that gives the investors the right to purchase a share at a specified strike price. Generally, this strike price is $11.50 and can be redeemed only during the redemption period. Besides that, these warrants can trade on stock exchange platforms at a price relatively lower than the stock price. Warrant trading is also popular among investors as they give more coverage in the market. With a small amount of invested money, you can control a lot of stocks of that company.
From the SPAC IPO date, it will have a 2 years time period to complete the business combination. Within this time period, the SPAC company will search for a private company that wants to go public. Also, the company needs to regularly file reports (10Q, 10K, 8K, etc) in the SEC. From these reports, investors can read about the financial statements, liabilities, operating expenses, revenues, assets, etc. If the SPAC cannot complete the merger, then it needs to return all the investments back to its investors.
How does SPAC Acquire a Private Company?
After the capital has been raised by the SPAC company, the managing team will continuously search for a private company. Once they have finalized their target they will go through the following steps.
SPAC Definitive Agreement
Once SPAC and found their target both the company will make an agreement. The SPAC definitive agreement is a report that announces their business combination. The company will announce the private company which they are acquiring, the combined company valuation, PIPE deals, future plans, and more. A definitive agreement only means they might undergo a merger if all the agreements are fulfilled. The merging process takes a certain time. During this process, the SPAC company undergoes multiple steps to complete the De-SPAC.
Private Investment in Public Equity (PIPE)
Private Investment in Public Equity (PIPE) is an agreement between a public company and private investors. Private investors are institutional investors that have a lot of money for investment. Generally, banks, financial institutions, individual persons, etc. are institutional investors. Whenever there is any shortage of money, these public company will sell their stocks to these private investors to generate more capital. This practice is most commonly seen during the business combination process. As for the combination to happen, the SPAC might not have enough capital. During this situation, these SPAC companies will reach out to private investors for extra capital. The private investors will be offered stocks at a discounted price than the market price. Yes, PIPE results in dilution in the total outstanding shares but they are important.
Once a SPAC has announced a definitive agreement with a private company, the De-SPAC transaction will begin. Not all the shareholders of SPAC might be satisfied with the company’s decision. They can show their disagreements towards the business combination. As a result, under the regulation of the SEC, the SPAC must go through a proxy vote. The SPAC company will list all the issues regarding the business combination and create a proxy statement. This statement will be filed to SEC for review. Once SEC has authorized, the proxy vote will start.
The SPAC company will forward this proxy statement to its shareholders either electronically or manually. The shareholders will vote on the required issues to show their agreement and disagreement. If the majority shows disagreement towards the business combination, then the statement will either be reviewed or the merger will not proceed. Any shareholder that has shown disagreement with the proxy statement can ask for redemption for their share. With this redemption, the shareholder will get the investment back at a Net Asset Value (NAV) per stock.
Stock Exchange Listing
Once the business combination is completed, the combined company will be listed on the stock exchange for trading. In most cases, the combined company will have a new name and a new ticker symbol. Even though the SPAC was listed on one stock exchange, the merged company can list on different stock exchanges. To list on any stock exchange, the combined company must satisfy certain requirements. The general listing factors are market cap, share outstanding, listing fee, etc.
How to Trade SPAC Stocks?
You can purchase SPAC stocks in a variety of fashions. You can purchase stocks from SPAC IPO when SPAC opens its initial public offering. You can purchase it directly from stock exchange platforms like NYSE or Nasdaq once they are listed. Other mechanisms are to invest in hedge funds and SPAC ETFs. SPAC-focused hedge funds will have an expert team that will use your money to invest in SPACs. SPAC ETFs are exchange-traded funds that will have a basket of SPAC stocks from different industries. Investing in hedge funds and SPAC ETFs require less expertise and are less risky.
Wrapping It Up
Special Purpose Acquisition Companies (SPACs) are great ways for investors to trade their money. They are less risky and if invested well with enough research, they provide a good return on investment. SPACs are so popular these days as they are the alternative path for private companies to go public.