Jan 04, 2022
Special purpose acquisition companies (SPACs) have emerged as a favored method of bringing firms public for many seasoned management teams and sponsors in recent years. A SPAC must first earn cash via an initial public offering (IPO) to acquire an existing operational firm. Following that, an operational business may combine with (or be purchased by) a publicly-traded SPAC to become a listed company, rather than going through the process of launching its own IPO.
This technique has numerous notable benefits over a standard initial public offering, including the ability to provide firms with access to money even when market volatility and other factors restrict liquidity. SPACs may also cut transaction costs while also shortening the time it takes for a firm to become publicly traded. So what is SPAC? Here you'll find details about a special purpose acquisition company (SPAC).
SPACs are often founded by investors or sponsors with specific knowledge or experience in a certain company or industry sector to pursue transactions in that sector. Suppose the founders of a SPAC have at least one acquisition objective in mind when forming the company. In that case, they may choose not to disclose that target throughout the IPO process to avoid excessive disclosures. For this reason, they are referred to as "blank check companies," since IPO investors often have no prior knowledge of the firm in which they will eventually invest. SPACs look for underwriters and investment firms before launching an initial public offering(IPO).
The assets that SPACs generate via an initial public offering (IPO) are deposited in an interest-bearing trust account. These funds may only be used to complete an acquisition or restore the money to shareholders if the SPAC is liquidated. They cannot be used for any other purpose. A SPAC typically has two years to execute a transaction, or else it will be forced to liquidate. In certain situations, a portion of the interest collected by the trust might be used to supplement the operating capital of the SPAC. The stock of a SPAC is typically listed on one of the main stock markets after the company's purchase.
Most of the time, a SPAC is founded by a management team with extensive expertise or by a sponsor with little invested cash, which normally translates into a 20 percent ownership stake in the SPAC (commonly known as founder shares). Public shareholders own the remaining approximately 80% stake via "units" issued in an initial public offering (IPO) of the SPAC's shares. Each unit comprises a common share and a portion of a warrant (for example, a warrant worth 12 or 13 percent of the stock). Founder shares and public shares often have comparable voting rights. The distinction is that founder shares typically have the exclusive power to elect SPAC directors, which is not always the case. In most cases, warrant holders do not have the right to vote, and only fully exercised warrants are available for redeeming.
An investor in a SPAC initial public offering (IPO) is taking a leap of faith that the business's promoters will be successful in purchasing or merging with a suitable target firm at some point in the future. Because of the lower level of control provided by regulators, along with a lack of information provided by the average SPAC, ordinary investors face the danger of being burdened with an excessively overhyped investment and, in some cases, fraudulent.
The existence of SPACs has been documented for decades, and they have often served as the last alternatives for small businesses that would have otherwise struggled to get capital on the open market. However, these have lately grown increasingly frequent due to the extraordinary market instability that has been exacerbated in part by the worldwide epidemic.
SPACscontinue to rise in favor of a viable liquidity solution for many firms. The SPAC merger procedure with a target firm may be concluded in as little as three to four months, which is much quicker than the average time frame for a standard initial public offering (IPO). To avoid being penalized, a target firm must accelerate public company preparedness far in advance of any SPAC merger. Aside from that, project management is required due to the short timetable of a SPAC merger to decrease execution costs, promote project efficiency, and offer working group members more responsibility and transparency.