What Are SPACs? | IPO 2 0 or FRAUD?!

0 16
Avatar for BudgetHolics
3 years ago

Here's a short overview of Special Purpose Acquisition Companies (SPACs), how they work, the advantages of SPACs over IPOs, the history of SPACs, how to determine whether to invest in a SPAC and what some of their proponents have to say.

How SPACs work

A Management Group, called sponsors, decides to form a SPAC. They raise money through an IPO by selling units, typically priced at $10, and they are made up of a share and a warrant, or partial warrant. The warrant is a contract that allows holders to buy a set amount of stock at a certain point in the future, for a predetermined price. Investors can buy or sell shares at the current market value, after the IPO.

The money from the IPO goes into a trust, usually held in Money Market accounts or short-term government securities, such as Bonds. Sponsors have 18-24 months to buy a company that shows tremendous promise.If they don’t do so, investors are reimbursed for their money, and their share is proportional to the units they own. If a company is found and approved by the board, the SPAC and the private company merge into a publicly traded company, AKA the de-SPAC process.Shareholders can decide whether to hold their shares, or pull the money out. If they stay, then their investment will rise and fall with the share price of the company. 

Sponsors are paid by the success of a SPAC through share ownership called a Promote, which allows sponsors to buy 20% of the outstanding shares at a discounted price. 

Advantages of SPACs

  • Bypassing regulatory barriers associated with traditional IPOs. 

  • Greater price certainty and control over the private company compared to a company taking the traditional IPO route, because there is less guesswork in determining at which price to offer the shares. 

  • For investors: Ability to get in early at an IPO → Enormous Potential

If the SPAC is successful, the initial investment will appreciate and investors will earn money.

History

Spacs have been around since the 90s, and they’ve gained a bad reputation for defrauding investors. However, they have been regulated by the SEC since 2011. This regulation allowed investors to redeem units, to cash out, before the acquisition

Last decade Tremendous Growth:

Examples:

Virgin Galactic (SPCE), Draft Kings (DKNG, Nikola (NKLA)

How to determine whether to invest in a SPAC

  • You can’t evaluate a product, since there isn’t any, so you must be absolutely sure, that the management team knows what they’re doing.

  • Carefully read SPAC’s IPO Prospectus as well as periodic and current reports, filled with the SEC

  • If a target company is identified, investors need to decide if it’s a good Investment. 

  • Weigh Opportunity Cost

    • Why invest in a SPAC and not an established company

      • A Study form 2011 to 2017, following 97 SPACs found that they underperformed the market by an average of 3%.

      • In 2015 -2019, majority of SPACs are trading below the $10/share mark.

Proponents 

Some SPAC proponents include Chamath Palihapitiya, founder and CEO of Social Capital, and Bill Ackman, founder of Pershing Square Capital Management.

Social capital allowed sponsors to buy shares at less than $0.01, while regular shareholders purchased shares at $10. However, SPACs are not without risk; Chamath is being accused of misleading investors.

Thank you to my sponsors:

Sponsors of BudgetHolics
empty
empty
empty

1
$ 0.00
Avatar for BudgetHolics
3 years ago

Comments