What are SPACs? Everything you need to know!

What do you know about SPACs?

No, SPACSs are not the latest garment everyone is raving about in the world of men’s fashion. (Example: “His SPACs are nice, but they don’t match his tie.”)

Nor is it a new sports statistic. (Example: “His ERA and OBP are good, but his SPACs will surely keep him out of the Hall of Fame.”)

SPACs are special-purpose acquisition companies. I guess that doesn’t tell you much, but bear with me. There’s more. 

SPACSs normally are looked at like this :

• They represent big money for merger purposes.

• They come brandishing “blank checks.

• They are not as risky as the traditional IPO.

• They are not as complex as the traditional IPO.

An IPO, by the way, is an initial public offering. It is basically viewed as the arrival or beginning of a firm in its public structure.

An IPO can change a lot about how that firm is managed. This means that stockholders can experience both opportunities as well as perils as investors.

Because IPOs are complicated and complex in the eyes of those who own or manage companies, more firms are going public through SPACs. 

SPACs Earn Recognition From the Wall Street Journal

Special-purpose acquisition companies have become so popular that the prestigious Wall Street Journal has called 2020 a record year for SPACs.

“More and more firms are finding that going the SPACs route has its benefits,” Journal writer Lee Alexander said. “That’s why we are hearing more and more about them today.”

Most people may think SPACs are the new kids on the block. Not so, SPACs have existed in their present form since 2003.

Research shows they were even in a low-scale manner back in the 1980s and 1990s.

When SPACs are launched they actually go through the IPO procedure, offering shares of stocks to investors. Typically, the proceeds from the IPO are held in trust.

SPACs Are Different Because They Seek a Takeover Prospect

“The SPACs are different because, instead of holding proceeds in trust, they seek a takeover candidate,” says Wall Street observer Luke Longmire.

“The conditions of the SPAC designate a given time span in which a merger must be in completion.” 

Longmire says that if that time period runs outs without a purchase being made, then SPACs will simply return capital to investors.

A merger will take place when the special-purpose acquisition company finds the right candidate. Then the two will engage in a merger. The operating business will normally retains its name.

The SPACs’ most valuable benefit is seen in its simplicity. Once the SPAC is in place, the procedure for doing the consequen merger is much easier than it would be to file a complete set of registration forms with the Security and Exchange.

The SEC usually has no issues or questions up front. 

So, what’s going on with the IPO? So many companies are going with special-purpose acquisition companies and moving away from the traditional IPO.

The Traditional IPO Is Not Going Away

Is the IPO, with all its critics, likely to become extinct?

I don’t think so, because there are downsides to going public through SPACs. 

“SPACs are more expensive than your traditional IPO,” according to Matt Levine, a Bloomberg columnist. “SPAC fees are disguised, but the truth is companies pay, when all is said and done, three or four times as much as they would pay for an IPO.”

Also, some stockholders are cautious and may back off from buying shares of a firm that went public through a SPAC. The IPO process can be long and difficult to navigate, so investors have a tendency to back away.