Imagine someone famous asking you to invest in a company, chances are, you will want to know more as it turns out, there is no company, at least not yet. Well, you part with your money, that is the pitch by owners or SPAC or Special Purpose Acquisition Company which is arguably the hottest asset class in the US of late led by notable investors, such as hedge fund billionaire Bill Ackman and former Facebook executive Chamath Palihapitiya.
I’m getting a lot of questions about SPACs this week’s backs this year have raised triple the amount that they did in all of 2019 with companies, slashing dividends and interest rates at rock bottom levels, investors are flocking to SPACs. So what exactly is SPAC and why are they so popular?
A SPAC or Special Purpose Acquisition Company is a blank check formed under a shell corporation that investors set up with the sole purpose to raise money through an IPO in order to acquire another company. These companies have become an increasingly popular method in recent years to list companies on a stock exchange, SPACs, a shell company with no actual commercial operations, but are created solely for raising capital through an initial public offering or IPO to acquire a private company.
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This is done by selling common shares. With SPAC shares, commonly sold at $10 apiece and a warrant, which gives investors the preference to buy more stock later at a fixed price. Once the funds are raised, they will be kept in a trust until one of two things happen. First, the management team has a SPAC also known as sponsors, that identifies a company of interest, which will then be taken.
Through an acquisition using the capital raised in the IPO or second, if the SPAC fails to merge or acquire a company within a deadline, typically two years, the SPAC will be liquidated and investors get the money back SPACs have existed in one form or another as early as the 99.
Typically as a last resort for smaller companies to go public, the number of SPAC IPO’s has waxed and waned over the years in tandem with the economic cycles and they have been making a resurgence of late notable SPACs include social capital hemisphere holdings, which acquired a 49% stake in British space flight company.
Is a SPAC a good investment?
Potential investors should be aware of a few issues with SPACs. SPACs don’t have to be subject to the same regulation as traditional IPOs. This is a popular way to go public. However, companies and individuals could take advantage of the lack of regulation.
Because you are essentially writing a blank cheque by investing in SPACs, they are known as blank check companies. You don’t know which company it will eventually acquire or whether it will be able to make it through the initial business combination. They don’t always pay off for investors.
SPAC History and Common Questions
Virgin galactic in 2019. The biggest SPAC on record raised $4 billion in July 2020 led by the hedge fund manager, Bill Ackman’s Pershing square on tine holdings. The structure of SPACs allows investors to contribute money towards the fund without any knowledge of how their capital will be used. Thus the term blank check card.
Well, what’s the difference between a SPAC IPO and a traditional one. There are several ways private companies can go public. The most common route is through a traditional IPO, but it’s subject to regulatory and investors scrutiny of its audited financial state. An investment bank is usually hired by the company to underwrite the IPO, which usually takes four to six months to complete this involves roadshows and pitch meetings between company executives and potential investors to drum up.
And demand in its shares and not all IPO’s succeed. Coworking space company. We work with growing its high profile IPO in 2019 emits weak demand for its shares after massive losses and leadership controversies. Other companies such as Spotify and slack went public through direct listings, saving on fees, paid to middlemen, such as investment banks.
Although there are more risks involved and while private companies listed through SPACs are similar to reverse takeovers, such as the case for an insolvent FinTech company. They are different in that SPAC. Start off on a clean slate and have lower risks because SPACs are nothing more. But shell companies, their track records depend on the reputation of the management teams by skipping the roadshow process SPAC IPO’s also typically list in a much shorter time.
Some investors become wary of buying shares in companies listed through SPAC, due to the lack of scrutiny compared to traditional IPO’s SPAC sponsors also typically receive 20% of founder shares in the company at a heavily discounted price, OSA known as the. This essentially dilutes the ownership of public shareholders.
For example, initial shareholders of social capital got 20% of the company at 0 cents. While public shareholders got the remaining 80% at $10 a share, how have SPACs Farish and equity markets, especially for ordinary investors? A study of 56 SPACs that completed acquisitions or mergers since the start of 2018 found that they tend to underperform the S and P 500 during a three, six, and 12 month period.
After the transaction, a separate study of blank check companies in the US organized between 2015 and 2019 found that the majority of trading was below the standard price of $10 per share. Between 2017 and the middle of 2019, there were slightly over a hundred SPACs in the US with an average return of a mere 2%.
If there’s one thing that markets hate that’s uncertainty, even before the pandemic SPACs were already on the rise void by the equity, boom, and hot IPO market in 2019. While the pandemic has slowed the pipeline of traditional IPO’s SPACs has bucked. With the quality of management teams, improving fewer disclosure requirements, and a relatively straightforward listing process, blank check companies are.
In fact, funds raised through SPACs, outpaced traditional IPO’s in August, a rarity on wall street, and the first 10 months of 2020, that will 165 SPACs IPO’s globally of which 96% of them were listed in the. That is nearly doubled. The number of global SPACs issued in 2019 and five times that of 2015 of the $56 billion poured into global SPAC.
The stings in 20, 20, 90 9% were raised in the US and that figure is nearly 12 times the amount raised globally in 2015, over the same period while largely an American phenomenon SPACs have caught the attention of investors and other jurisdiction. In 2018, Anthony Leo, the formal finance secretary of Hong Kong raised $1.5 billion on the New York stock exchange through his SPAC, which bought a mainland hospital chain a year later.
Other players include Masayoshi son SoftBank, and the investment of Chinese state-owned conglomerate cities. Despite having sponsors from Asia, looking to acquire international companies. These SPACs are ultimately listed in the US as a similar story in Europe, which has seen muted SPAC active. For example, the management team of blank check company brought stone acquisition Corps is based in London, targeting private companies in the UK and Europe, but as listed on the New York stock exchange, one main reason is the different rules for SPACs across jurisdictions in the US investors can vote to approve the acquisition, the SPAC proposes or redeems their funds.
If they do not support the proposed. This however is under the requirement in some European jurisdictions, including the UK. There is also a lock-in period for British investors. Once an acquisition is announced until the approval of the prospectus, which ties them into deals that they may not support in the indefinite period, but changes may be afoot as SPAC activity reaches fever pitch in the US regulators are putting these blank check companies under the.
Competition to the IPO process is probably a good thing, but you need good information for good competition and good decision-making. And one of the areas in the SPAC space that I’m particularly focused on is incentives and compensation to the SPAC sponsors. However, investors like Palihapitiya have defended SPACs transactions saying that they are no different from the fees that banks collect in the traditional IPO.
As smart ordinary investors, jump on the SPAC. Then wagon experts are concerned that this will overheat markets and affect any fragile economic recovery. While SPACks provide a straightforward route to invest through a trusted intermediate. As performance so far means that it is a dicey bet for ordinary investors.