2021: Year of the SPAC
In 2021, a record-breaking 613 SPAC IPOs were filed, 247% greater than last year’s 248. Among these SPAC IPOs were major companies spanning industries from fintech like SoFi to healthcare insurance like Clover Health to quantum computing like IonQ and Rigetti. With more and more companies choosing to IPO through a SPAC instead of a traditional IPO, it is vital to understand why this is occurring as well as the pros and cons of both processes.
First, let’s understand what SPACs are. SPAC, or a special purpose acquisition company, is a company with no commercial operations that exists solely to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company. SPAC CEOs do not release their acquisition target, so IPO investors usually do not have an idea about the company that they are investing in.
SPAC IPO Process:
- SPACs are generally first formed by investors or leaders (ex. Bill Ackman, Chamath Palihapitiya) with expertise in certain industries that wish to utilize the money raised during the IPO to pursue deals in that area.
- SPAC CEOs attract investors to invest in their shell company based off of the SPAC CEOs track record and vision.
- The SPAC files for an IPO which is incredibly quick (takes about 8 weeks) since the company has no financials.
- The SPAC CEO has two years to find a company to acquire and if an acquisition target is found, the target merges with the SPAC and is now a publicly traded company.
Advantages of SPACs:
- Speed: A merger between a SPAC and its acquisition target usually takes between four to six months while traditional IPOS take up to 18 months.
- Cost: Traditional IPOs require investment bankers to evaluate a company and determine a reasonable price at which to offer stock shares which costs around 4 to 7% of the IPO’s proceeds.
- Volatility: Traditional IPO is subject to the stock market’s mood at the moment while SPAC deals are done in private which may allow it to avoid the ups and downs of markets.
Disadvantages and Concerns:
- Lacks due diligence: SPACs circumvent the thorough review process of a traditional IPO which allows investors to see a clear view of a company which may lead to lackluster performance after going public.
- Recent regulatory scrutiny: The Securities and Exchange Commission (SEC) is increasing their oversight on SPAC deal structures and financial statements.
- Failure to find target: While SPACs may say that they will acquire a target company, some fail to do so in two years which means the investment goes by without a deal, which is money that could’ve been invested elsewhere.
With the ascent of SPACs in the current ecosystem, investors must understand the benefits of this popular investment method such as its speed and cost as well as its drawbacks such as its lack of vetting and increasing regulatory scrutiny. Considering these factors, investors will not only develop a more holistic understanding of the technological landscape but also how to properly invest to contribute to the bustling economy.