We’ve got acronyms left, right and centre in the financial world. Ya could say, it’s rife. We’ve got IPOs…NFTs…and we’ve also got SPACs - aka, Special Purpose Acquisition Companies.

Now, although SPACs are called a ‘company’, they actually have no commercial operations.  That’s right - zilch, zero, nada. The one and only purpose of a SPAC is to raise capital through an IPO and then find a private company to buy, and ultimately turn that company into a public company.

SPACs tend to have a few names. You may hear them referred to as ‘shell companies’, or ‘blank cheque companies’. The reason for this is investors (or SPAC ‘sponsors’) essentially hand the company a ‘blank cheque’ to go out and purchase a company.

How does a SPAC go public?

When a SPAC IPOs and therefore goes public it will sell ‘units’ in the company - generally at US$10 per share. At that point, the company trades on the stock market just like any other company would. Put simply, this means shareholders can buy and sell units as they would any other shares. 

But here’s the catch: as mentioned above, the SPAC has no business behind it. It’s just a blank cheque. So, once it’s public, the SPAC typically has between 18 to 24 months to find its perfect pair - aka a company to invest in - and if it can’t make a deal in that time…then the old SPAC may get liquidated.

Why do companies choose to go public via SPAC?

The IPO process can be long, draining, and boy oh boy can it be expensive. So, often a SPAC is a ‘lil more of an economical move.

Let’s talk about timing…A SPAC acquisition or merger typically takes between 3 and 6 months. Meanwhile, an IPO can take 12 to 18 months.

There’s one more reason why SPACs are popular. SPAC investors are generally experienced in a particular industry, so the companies they acquire can gain access to industry professionals as they navigate their growth path forward.‍

What if a SPAC investor doesn’t like the company they’ve invested in?

Luckily, in this corner of the finance world there’s a returns policy. 

Once the SPAC announces who it’s going to merge with, or be acquired by, the SPAC needs to offer its investors the option to redeem their shares. The reason these investors may want to redeem their shares is because they may not be too keen on the chosen company.

In other words, the investors that redeem their shares in the SPAC at US$10-a-pop believe that the value of the shares in the SPAC will drop below US$10 over time - which means shareholders will lose money. Not fun. 

For example, in December 2021, when the SPAC that merged with BuzzFeed announced that BuzzFeed was indeed its target company, around 94% of investors in the SPAC redeemed their shares prior to the merger taking place. Probably not the biggest vote of confidence.