The SPAC Phenomenon
A SPAC is a shell company established by investors to raise money through an IPO with the goal of acquiring another company. Investors buying into a SPAC IPO generally do not know what acquisition the SPAC will make, which is why SPACs are often referred to as “blank check” companies.
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The SPAC Phenomenon
SPACs (Special Purpose Acquisition Companies) have been the talk of Wall Street … and it’s little wonder why. SPAC offerings increased over 300% in 2020, raising over $83 billion. The pace accelerated in 2021, with April YTD issuance already 24% higher than all last year and nearly $100 billion in raised funds.1
What is a SPAC?
A SPAC is a shell company established by investors to raise money through an initial public offering (IPO) with the goal of acquiring another company. Investors buying into a SPAC IPO generally do not know what acquisition the SPAC will make, which is why SPACs are often referred to as “blank check” companies.
Why a SPAC?
SPACs offer companies advantages to going public over the traditional IPO route. Chief among them are:
- Faster execution than a conventional IPO—typically three to six months, versus the 12-plus months it takes for a regular IPO
- Less expensive since there is no need to generate investor interest through costly road shows
- Price discovery may hold less risk, as prices are negotiated prior to the transaction, rather than arriving at a price during a potentially volatile market environment.
There are disadvantages to SPACs, however, including:
- The potential for substantial shareholder dilution (founders may own a 20% stake through founder shares, plus warrants to purchase more shares and an ability to earn more shares if a price level is reached
- Little incentive for original investors to stay invested; lock-ups generally do not extend beyond a year and may be shortened if the share price reaches a prescribed level
- A higher burden for the acquired company in preparing SEC filings and establishing the functions to support a public listing
- An absence of investor protections against making unrealistic or misleading projections; the EV space has been particularly egregious in this regard
What’s Next for SPACs?
The recent froth in SPACs appears to be abating, as investor interest wanes. One reason may be performance related. According to one study, SPAC shares tend to drop by one-third or more within a year following a merger, though performance will vary widely depending on the sponsor.2
Another factor is the increased focus by the SEC, which recently sounded a warning to companies over misleading statements about their growth potential and signaled that they would be giving SPAC deals the same scrutiny as IPOs.
SPACS seem to be here to stay. Expect some of the worst terms and structures of SPACs to change for the better as the investing public becomes more educated and demands better treatment, with private equity firms coming to dominate this space, replacing individual sponsorship of SPACs.
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