In 2020, despite the ongoing pandemic, multiple companies have launched IPOs through less traditional means. The current trend for raising capital is a variant of a public offering but without the traditional structure of an operating company and through a shell company. This evolving method of raising capital requires less scrutiny and shorter time frames.
The shell company, Special Purpose Acquisition Company, or SPAC is in essence a non-operation entity formed for the purpose of raising capital and seeking investments. SPACs are generally formed by investors, or sponsors, with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don't identify that target to avoid extensive disclosures during the IPO process. Informally, they are called blank check companies because of this.
The goal of a SPAC is simple; thy are a vehicle to raise capital. This investment, unlike a traditional IPO isn’t for the company itself. Rather it’s to take another company or companies public. Once they have acquired the company in question, investors swap the shares from the acquisition company to the acquired company. For example, Diamond Eagle Acquisition Corp went public through a SPAC in late 2019. It then acquired the gambling site DraftKings which in turn went public immediately once the deal was finalized in April. In this case, Diamond Eagle used the assets it had raised to essentially merge itself with a company looking to go public without the hassle of an IPO.
The number of SPACs formed have exploded in the last two years. According to SPAC insider, when this new process began in 2009, only one company used this method. In 2019, 58 used them. Then in 2020, the number of SPACs quadrupled to over 240, with an average investment of over $330 Million. In March of 2021, the report shows 360 SPACS announced or are already in a process of filing for an IPO. With so much money being invested in, the market is very lucrative.
There are some risks involved with this type of transaction. Investors buying into these companies have no idea what company they are investing in. Though the amounts very, the shares for this investment company can go as low as $10. In addition, there is a time limit for the capital to be acquired and use, typically 24 months before the company is liquidated and investors get their money back with built in interest. In addition, there is also the likelihood that a company could be rejected for one reason or another. There are considerable risks involved with something such as this and as a result must be handled carefully.
SPACs are the new trend of getting a company to public trading. But like with any investment its inherently risky. Consult your advisors on what to do if you wish to invest in one or merge with one.
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