SPAC Investing: What, Why and Common Questions from Investors
SPAC investing is becoming increasingly popular. As more companies choose this method of going public, more investors are curious about investing in SPACs. Let’s take a look at what it is and how SPAC investments work.
What is a SPAC?
A SPAC is a special purpose acquisition company. Also known as blank-check companies, these companies have no business operations. The company is formed to raise funds in an initial public offering (IPO). It then uses the funds to acquire a private company, effectively bringing it to the public market.
SPACs are usually formed by investors with knowledge and experience in a particular industry or market. Typically, the company intends to pursue an acquisition within that industry. However, although the founders might have a particular company in mind, it isn’t disclosed. This is because while it might be the ideal target, it isn’t guaranteed. So, SPAC investing can be a risk because investors don’t know for sure what they’re investing in.
SPAC IPO Process: How and Why
The SPAC IPO process is simpler and faster than the traditional IPO process. A traditional IPO requires a lot of time, money and paperwork. A SPAC still needs to file a prospectus with the SEC. But since a SPAC has no business, there’s little to report. In the SPAC prospectus, the company will talk about things such as:
- Risk factors
- Use of proceeds
- Proposed business
- Management’s analysis of financial condition
- Management’s analysis of results of operations
SPAC stock will usually be priced at a standard $10 per share. The proceeds will be placed in an interest-bearing trust. The company then has up to two years to find an acquisition.
SPAC investing has become popular in the last few years. But why is that? As mentioned, the SPAC IPO process is faster and requires fewer steps. Instead of taking six to nine months like a traditional IPO, a SPAC IPO can be accomplished in weeks. It also provides less risk than a traditional IPO. And the acquired company doesn’t need to find investors. SPAC investing provides the money and the investor demand. This allows a direct market listing.
For those interested in investing in SPACs…
Common SPAC Investing Questions
What happens when you buy SPAC stock? When you buy SPAC stock, it’s commonly at $10 a share and a partial or full warrant.
What is a SPAC warrant? A SPAC warrant gives you the right to purchase common stock at a particular price. For example, let’s say you get a warrant for $12 at a 1:1 ratio. That means one warrant equals one share. If the stock price goes up to $20 after the merger, you can exercise your right to buy it at $12. This gives you an instant gain of $8.
Make sure you read the SPAC’s prospectus to understand the rights you have as a SPAC investor.
What happens to SPAC stock after the merger? After a merger is completed, shares of common stock automatically convert to the new business. Other options investors have are to:
- Exercise their warrants
- Cash out
What happens if a SPAC doesn’t merge? SPACs are typically not allowed to use the raised proceeds for any reason other than an acquisition. So, if no acquisition is made within two years, it will take the money from the trust and return it to investors.
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Like any investment, investing in SPACs comes with its own risks. But as SPAC investing grows in popularity, investors should see more coming to the market.