Pros and Cons of Special Purpose Acquisition Companies SPACs

That company has no commercial operations and does not produce products or sell any goods or services. Wolters Kluwer is a global provider of professional information, software solutions, and services for oanda review clinicians, nurses, accountants, lawyers, and tax, finance, audit, risk, compliance, and regulatory sectors. But, like every other capital formation strategy, Reg A comes with its own set of issues.

The traditional route to taking a company public is to go through an IPO. They have to be underwritten by an investment bank, scrutinized by the Securities and Exchange Commission and extensively marketed to ensure shareholders see demand for their shares. Additionally, IPOs come with certain restrictions such as lockup periods, and they can open shareholders to much steeper price volatility, as seen in Airbnb’s share price since its December IPO. Distilling the concept to its roots, think of a SPAC as a type of blank check company that raises capital from investors through a specialized IPO.

  • It’s a win-win scenario, where companies that may not otherwise go public in the current market are afforded an opportunity to do so, while the SPAC might be able to make a bargain deal.
  • Not to mention, SPACs that year made up roughly 50% of new publicly listed US firms, according to HBR.
  • The ecosystem for Reg A issuance is still evolving with just a few key players.
  • That’s where a special purpose acquisition company or SPAC comes in.
  • Further, I think SPAC terms will change with time and become more attractive to investors.

These days, a SPAC, or “Special Purpose Acquisition Company”, is a constant feature in the stock exchange market news and there is a definite reason for it. The truth lies in the fact that SPACs provide a more simplified mechanism and needed flexibility for going public to private companies. To date, a number of more than successful SPACs have been formed (QuantumScape, DraftKings, Iridium, etc). This is more funds per year than in the last 10 years together.

Potential Pitfalls Of SPACs: What CFOs Need To Know

Thankfully, the SEC stepped in to provide some much needed boundaries for these shell companies, laying the groundwork for the modern SPAC. Since the 90s, their popularity has – once again – ebbed and flowed according to market conditions, the health of the IPO market, and the overall economic environment. They surged just before the Great Recession but virtually disappeared for a short time afterward, only to reemerge like a financial Phoenix in 2015 and calm down again as of late. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

Some investors may also judge that participating in the IPO will enable them to achieve a bigger stake in the company than they’d manage in a traditional IPO. There are some SPACs which go on to deliver very strong returns. The most successful is the fantasy sports and betting company, DraftKings (which merged with Diamond Eagle Acquisition SPAC in April 2020). Its share price is close to $70, a handsome return on a $10 investment.

An Entrepreneur’s Guide To IPOs, SPACs And Regulation A

In the first 3 months of 2021, 295 special purpose acquisition companies were created with $96 billion invested. Once a company combines with a SPAC, the SPAC’s shareholders get a minority stake in the target company (the acquired firm). Meanwhile, the target company’s shareholders “exchange their shareholding for listed shares in the SPAC,” according to Consultancy.

One of the most severe criticisms against SPACs is that they generously reward sponsors. For instance, shell company founders often receive 20% equity in the target acquisition firm, which is a hefty load for what basically is a one-shot endeavor. Essentially, SPACs provide an alternative for typically privately held startups to go public without having to endure the onerous and lengthy vetting process of a traditional IPO. SPACs can navigate around disruptions that impact federal institutions such as the U.S. Securities and Exchange Commission (SEC) — a relevant advantage during the pandemic-fueled shutdown.

One of the biggest risks is that the SPAC may not be able to find a suitable acquisition target within the allotted time frame. If this happens, the SPAC will be liquidated and investors will lose their money. SPACs have a longer window in which to position the company based on forward-looking projections. This extensive and confidential pre-marketing period gives a company and its investors time to gain greater insight into the potential investment and gauge whether the valuation is appropriate. IPOs can share past financials and share addressable market size but cannot get into detailed financial projections. “Until a deal is announced, the investor is just hoping that a good merger will happen,” Ritter adds.

Downsides of SPACs

When more public shareholders redeem shares than expected, sponsors may be forced to turn to the debt markets or raise more PIPE financing to make up for the shortfall. Each SPAC deal offers a unique opportunity for a target to go public with the support of an experienced sponsor who brings substantial operational expertise and vast industry experience. In most cases, the sponsor will also assemble a seasoned board of directors to help the target’s management team execute their strategic vision. Building your financial acumen and understanding the implications of a SPAC is critical to your journey as a board member or executive. You don’t need to be a financial expert or a board director to have heard about SPACs (Special Purpose Action Company) as one pathway for taking a company public.

SPAC investing has become all the rage on Wall Street. But does that mean you should invest in one of them?

The Carlyle Group and Goldman Sachs, among others, have sponsored SPAC IPOs, and innovative firms such as Virgin Galactic and DraftKings have gone public through traditional SPAC structures or reverse mergers. Typically for both SPACs and reverse mergers, the management and operations of the private company remain intact after the acquisition, and in most cases become the leadership team of the newly public entity. Many private organizations use the SPAC structure to become public companies. Сlevver has the capabilities and high-level expertise to help with the setting up of a SPAC. An IPO entails the involvement of underwriters, an investment memorandum, etc.

Granted, the fervor has nearly flatlined since then due to market volatility, general uncertainty, and the SEC’s recent proposed rules. Still, for the right entities and under the right circumstances, SPACs will continue to be an appealing pathway to public company status. Of course, not just anyone can or should establish a SPAC since, like any other type of investment, trust is an absolute requisite. Therefore, only experienced sponsors – both firms and roboforex review individuals – with sterling reputations and demonstrated success in the space use SPACs to raise capital. FBI, YOLO, SEC (both the commission and conference), NASDAQ – it’s not just a matter of understanding what the letters stand for but, more importantly, the underlying meaning as well. And while a special purpose acquisition company (SPAC) might seem like another confusing bowl of alphabet soup at first, SPAC is an acronym that’s all bark and no bite.

In 2015, the SEC introduced Regulation A filings as a part of the JOBS Act. Regulation A filings, referred to as “mini IPOs,” allow companies to raise up to $20 million under Tier I and $75 million in a year under Tier II. By filing for Regulation A with the SEC, private companies essentially are able to raise public dollars while still remaining private. A company still has to meet certain eligibility requirements, and in Tier II, there are limits on what non-accredited investors are allowed to invest.

The Benefits and Risks of SPAC IPOs

SPAC shareholders typically end up holding a minority stake in the merged entity. Sponsors typically get around a 20% stake in the SPAC in return for a relatively small cash investment the commitments of traders bible e.g. $25,000 (although these terms are becoming less generous for sponsors as the market develops). If the SPAC is successful, their shares will be worth a significant amount.

But post-SPAC IPO, those historical financials must now comply with Regulation S-X and the US GAAP requirements for a public company. Well, don’t be surprised if you have to revise those historical financials – while also including additional disclosures – before filing them with the SEC. SPACs have a bit of a rocky history, through no fault of their own.

Leave a Comment

Your email address will not be published. Required fields are marked *

Shopping Cart