How Regular Retail Investors Can Cash In On Red-Hot SPACs
SPACs are the hottest investment vehicle today.
SPACs are Special Purpose Acquisition Companies, also known as “blank check companies.”
They are basically shell companies without any business operations that raise hundreds of millions of dollars to then acquire with an operating company.
The SPAC gives the acquired company a public listing so regular investors can buy it just like a stock and additional capital to accelerate growth.
As a retail investor, you might be interested to know that SPACs offer you a chance to participate in transactions that are typically reserved for private capital groups, such as private equity funds and family offices.
Here’s what you need to know.
Why do Companies and Investors Opt for SPAC-Based IPOs?
SPACs offer several advantages to companies that would like to go public without the trappings of a typical lengthy IPO process.
Not only are SPACs exempt from the majority of the paperwork that is required in a straightforward IPO, but they are often subject to less scrutiny from regulatory agencies.
Additionally, there tends to be less valuation pushback from IPO investors when going public via a SPAC, which appeals to first-mover companies that have not yet proven their business model.
Pre-IPO fundraising for SPACs can also be done without the usual associated costs, such as investor roadshows.
SPACs also offer shareholders certain advantages, including freedom from stifling regulations, like 180-day lockups, while shareholders of smaller private companies, such as private equity funds, can be attracted to acquisition by a SPAC as a speedier means of liquidating their shares.
How SPACs Work
Typically, a SPAC will begin by going through an IPO process, during which time shares of the “blank check” shell are offered to investors.
This capital is then held in trust while the SPAC seeks a suitable takeover candidate.
Once the shareholders in a SPAC have determined a suitable target company, the two companies will complete a merger or acquisition and list publicly under a ticker that reflects the target company.
SPACs are generally considered a low-risk entry into IPOs, for several reasons.
First, according to regulations, a SPAC must complete the intended transaction within a given timeframe (typically 18-24 months), and if no transaction takes place, the SPAC will liquidate and the money will be returned to investors.
Additionally, shareholders of the SPAC typically vote to accept a proposed transaction, and individual investors have the right to reject such a proposal and redeem their shares at full value.
It is also common for the initial investors in a SPAC to be offered a chance to purchase warrants, which allow them to buy more shares at a predetermined price, after the acquisition is made.
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SPACs are Hot in 2020
SPACs have been on the rise in recent years.
In 2019, SPACs raised a record-breaking US $13.6 billion.
So far, in 2020, an astonishing 40% of IPOs by volume have been SPACs, raising a total of US $31.6 billion as of September 2020, according to Bloomberg.
SPACs largest backers include Goldman Sachs, Credit Suisse, and Deutsche Bank participating as underwriters in blank check deals.
Recently, hedge fund manager Bill Ackman created the SPAC, Pershing Square Tontine Holdings, the largest SPAC to date.
Tontine has raised around US $4 billion, while several recent high-profile IPOs started out as SPACs.
In 2017, Social Capital CEO and venture capitalist Chamath Palihapitiya raised more than $650 million for his SPAC, Social Capital Hedosophia, which began trading under the ticker IPOA.
In 2019, IPOA completed a merger with Richard Branson’s intergalactic tourism company, Virgin Galactic, and began trading under the symbol SPCE.
Other recent high-profile SPACs include electric-powered truck manufacturer Nikola Corp. (NKLA), which went public in 2019 via a reverse merger with the SPAC VectorIQ Acquisition Corp., and digital sports entertainment and gaming company DraftKings (NASDAQ: DKNG), which went public in 2019 via a three-way merger with the SPAC Diamond Eagle Acquisition Corp., and SB Tech.
What Else to Consider
Historically, SPAC-based IPOs have been more common before the occurrence of an economic downturn.
The recent popularity of SPACs is not surprising when we consider the impact that events such as the global pandemic and the upcoming US presidential election have had on the financial markets.
The volatility of 2020’s markets has forced many companies to delay going public, so it is only natural that they might turn to a faster and less burdensome route. Second, it is possible that fears over a looming bear market have caused investors to seek opportunities to liquidate while markets are still relatively healthy.
When done right, SPACs can potentially offer a low-risk, high-reward scenario in which investors can see very strong returns in a relatively short period of time.
It’s important to keep in mind when investing in a SPAC that you are essentially investing in the leadership team’s ability to find a smart acquisition.
Therefore it is essential that you do your own due diligence and carefully evaluate any proposed transaction.
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