A special purpose acquisition company, also known as a "blank check" shell corporation, is a company formed for the sole purpose of raising money through an IPO and using this capital to acquire an existing business.
SPACs are unique entities, with no pre-existing business operations and at formation with no exact target acquisition plan.
Over the past years, they’ve become a popular vehicle for taking private companies public since they can provide an easier route than the traditional IPO process.
In general, a SPAC is set up by a management team, formed by financial experts, private equity sponsors and activist investors, that leverage their knowledge of a specific industry to raise capital.
Typically, when a SPAC IPO’s, it issues ‘units’ for $10.00 each. These units usually contain a common stock element and full or partial warrants that give the holder the right to buy more shares in the future.
SPAC units generally trade by themselves until 52 days following the IPO, at which time the units split into the common shares and warrants and get traded separately. Once the units split, retail investors can access these instruments on platforms such as Freetrade. The capital raised via the IPO is deposited in a blind trust until the SPAC agrees on a merger or acquisition. There is a window of two years to identify a potential merger; otherwise, the SPAC must return the funds they raised to their shareholders.
If the de-SPAC transaction is completed, then it’s common for the SPAC to change its name and ticker on the stock market.
Risks to consider when investing in SPACs
Despite their popularity, investing in SPACs carries certain risks. Unless the de-SPAC transaction is in progress, you don’t know what business the SPAC will acquire and therefore you can not count the corresponding risk that the acquisition might carry. When you invest, you also don’t know if the SPAC will successfully complete an investment within the required period. Like all investments in stocks, your capital is at risk when you invest in SPACs. The relationship with deal-making means SPAC share prices can be particularly volatile.
Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).