A special purpose acquisition company, or a SPAC, is a publicly traded shell company that raises collective investment funds through an initial public offering (IPO) in the form of a blind pool.
Also called “blank check companies,” SPACs are formed strictly to raise funds through an IPO in order to acquire private companies.
The funds are placed in a trust until a predetermined period of time elapses or an acquisition is made and the fund is liquidated. These development stage companies purely rely on funding through an IPO and have no operations.
SPACs have been in existence since the early 2000s, but they have enjoyed a resurgence in popularity lately.
According to data provider Dealogic, U.S.-listed special purpose acquisition companies have raised $40.4 billion so far in 2020, up from $13.5 billion during the whole of last year.
By comparison, companies raised $51.3 billion this year through traditional flotations, roughly on par with all of 2019, Dealogic said.
How They Work
As earlier mentioned, SPACs sole intent is to raise capital from the investing public and then look to acquire an operating business – often one that is privately held.
Essentially, investors write a check to a publicly traded shell company whose purpose is to go shopping for a private company and in effect bring it public through the listed holding company.
Anyone can put money in a special purpose acquisition company, ranging from public to private entities. SPACs usually have two or three years to make a deal before they have to return the funds to shareholders.
After that date, they would have to give the money raised in their initial public offering back to shareholders.
Why SPACs are Important
SPACs have often been used to ease a company’s route to market without having to follow the tougher governance and listing rules that apply to traditional initial public offerings.
Instead of filing all the paperwork associated with the required registration statement with the U.S. Securities and Exchange Commission (SEC), a company can merge with another company that has already gone public, which is why investors turn to SPACs in order to take advantage of that rule.
In other words, the plan is to raise money from investors and use it to acquire another company, typically a privately-held company that is yet to be chosen.
However, they are rather risky, and due to much uncertainty, the SEC requires these companies to offer more protections for their investors, to make sure their investments are allocated appropriately.
Critics have rightly complained that in many cases, the rewards are skewed towards their founders.
Some of the newer U.S. SPCAs have sought to reassure Wall Street and insist that their merger prospectuses will be just as comprehensive as those required for traditional flotations.
Example of SPAC deals
Opendoor and Social Capital II
Home-buying startup Opendoor is slated to go public this year through a merger with Social Capital Hedosophia II, a SPAC led by venture capitalist Chamath Palihapitiya, an early Facebook executive.
The deal values the San Francisco-based company at an enterprise value of $4.8 billion, and is expected to generate up to $1 billion in cash proceeds.
According to the companies, existing Opendoor shareholders have agreed to roll all their equity into the new company.
Opendoor enables users to buy or sell homes online with the click of a button. It is present in 21 markets in the U.S., including Orlando, Phoenix, and Atlanta.
DraftKings and Diamond Eagle Acquisition
Online sports gaming company DraftKings managed to go public earlier this year after closing a $3.3 billion merger deal with sportsbook technology supplier SBTech and Diamond Eagle Acquisition, a SPAC founded by former MGM chair Harry Sloan that was already publicly traded.
Diamond Eagle paid $2.7 billion in cash and stock for both DraftKings and SBTech. DraftKings got the lion’s share of the transaction with $2.055 billion in cash and stock.
The deal allowed DraftKings to trade under the DKNG ticker symbol on the Nasdaq Global Select Market. The company is considered a controlled company because co-founder and CEO Jason Robins owns nearly 90% of the voting rights via a dual-share structure.
Nikola and VectoIQ Acquisition
Embattled electric-truck startup Nikola went public through a reverse merger with VectorIQ Acquisition, which was announced on March 3. The deal gave Nikola an enterprise value of $3.3 billion and raised $525 million from investors.
Nikola is focused on developing electric-powered semi-truck and pickup truck vehicles. Shares of the company are down more than 70% from a high of $79.73 on June 4 when the merger was officially completed.
The slump came after a short seller published a report claiming Nikola was an “intricate fraud” that had faked product launches and exaggerated its technology to woe investors.
Hyliion and Tortoise Acquisition
Hyliion Investor Presentation Hyliion, a company focused on developing a semi-truck powered by hydrogen, recently went public via an acquisition by shell company Tortoise Acquisition.
Tortoise Acquisition shareholders approved the merger on Sept. 28. The deal resulted in the combined company being renamed Hyliion Holdings Corp, with its share being listed under the ticker symbol “HYLN” on the New York Stock Exchange (NYSE).
Through the merger, Hyliion is set to receive $560 million in proceeds to drive its continued development and marketing of its Hybrid and Hypertruck ERX electrified powertrain solutions.
Founded in 2015, Hyliion currently sells components and parts that help commercial trucks to become more efficient and produce fewer emissions. But its long-term target is to develop electric powertrain systems that it believes will bring positive changes to the commercial transportation industry.
Fisker and Spartan Energy Acquisition
Fisker, an e-mobility automaker, entered into a definitive agreement with a Spartan Energy Acquisition on July 13 for a business combination that would result in Fisker becoming a publicly listed company.
Based in Los Angeles, Fisker aims to revolutionize the automotive industry by designing eco-friendly electric vehicles, supported by advanced mobility solutions.
Special purpose acquisitions companies certainly have some potential benefits. According to figures compiled by SPAC Insider, there have been 128 SPAC public offerings since the beginning of the year, raising more than $49 billion.
For now, SPACs are outperforming traditional IPOs: capital raised via SPAC deals surpassed conventional IPOs for most of the third quarter.
However, SPACs also have serious drawbacks that can leave a foul taste the mouths of investors
You are probably best advised to assess the risks before you jump on the bandwagon.
But if you have to test it out to see what it is all about, keep your position size small and don’t risk more than you can afford to lose.