What are SPACs?

As per SPAC insider, of the 755 IPOs by blank-cheque companies since 2009, 248 happened in 2020 and 281 in 2021 so far. The gross proceeds raised by SPACs in 2020 amounted to over $83 billion, while for 2021 the number stands at $91.65 billion as of now. Now we will tell you what is SPACs and how to invest in them.

What are SPACs?

SPACs or Special Purpose Acquisition Companies is another name for a “blank check company” meaning an entity with no commercial operations that complete an initial public offering (IPO). After becoming a public company, the SPAC then merges with (or acquires, but usually merges with) an existing private company, thereby making it public. Before completing a merger or acquisition, many SPACs provide no indication to investors about what type of company they plan to merge with or buy. In effect, the “special purpose” of SPAC is to bring a promising private company to the public investment market. While SPAC strategies are in some respects complicated and multi-step, they tend to take less time to complete than traditional IPO listings and can be cheaper. The advisory fees associated with going public via a SPAC tend to be far lower than the fees charged for a traditional IPO. Early-stage companies can more easily comply with the requirements to merge with a SPAC than they can complete an IPO. The SPACs typically price their IPO shares $10 apiece, and they often offer warrants to buy additional shares or provide some other sweetener to entice investors to buy into the unknown. It also identifies and negotiates with a private company by swapping the cash it raised via its IPO and its status as a publicly traded entity for a percentage of the post-merger business. Also, shares prices tend to soar higher when the acquisition target is announced, but if sentiment changes or the deal overly dilutes the value of the original shares by including a lot of money from new investors, a SPAC’s share price may decline after the deal is announced.

How to Invest in SPACs?

Buying a SPAC (Special Purpose Acquisition Companies) is just like buying a regular stock. The first thing to do is to go to your online brokerage then search for the ticker symbol you want and then execute a market or limit order. Before SPAC sends a letter of intent with the proposed buyout target, though, you are clueless about what management is considering, you should treat SPACs as private equity ventures which are invariably high-risk, high-reward ideas.