Instead of going through the traditional IPO process, the company merges with a previously listed shell company to become a public company.
SPAC (Special purpose acquisition company) is also known as "hollow company". This is a shell company listed on the stock exchange with the purpose of acquiring or being acquired by another private company, thereby helping the company to list without going through the traditional initial public offering (IPO) process and related regulations. This method is used by ride-hailing platform Grab, sports betting service DraftKings, media company BuzzFeed, electric car company Nikola Motor and most recently electric car company VinFast to become a public company.
Typically, a SPAC deal will have four stages. First, the sponsors will create a blank slate, with no specific business operations, no products or services. The sponsors are often well-known investors, private equity firms, or even venture capitalists.
Next, the SPAC begins an IPO to raise capital. The company’s only assets are the proceeds from the IPO. The SPAC is still subject to the IPO process like any other business and has a stock ticker. The majority of the money invested by shareholders is held in an interest-bearing trust account and cannot be released except to complete the acquisition.
The SPAC then needs to look for another company to acquire or merge with. If a SPAC does not merge with or acquire a company within the first two years of going public, the money must be returned to shareholders.
Finally, when the deal is complete, the acquired or merged company will be listed on the stock exchange.
In the US, SPACs are registered with the Securities and Exchange Commission (SEC) and are considered publicly traded companies. Retail investors can buy shares of the empty companies on stock exchanges before a merger or acquisition takes place. This gives them the opportunity to invest in fast-growing, profitable startups — a privilege previously reserved for the wealthy. For this reason, according to Bloomberg , they are sometimes called “poor man’s private equity funds.”
Most companies pursuing SPACs are opting for the Nasdaq or the NYSE in the US, but other exchanges such as Euronext Amsterdam, the Singapore Exchange and the Hong Kong Stock Exchange are also seeing the trend.
SPACs offer advantages for companies that are planning to go public. The SPAC public offering process can take several months, while a typical IPO process can take anywhere from six months to more than a year. Traditionally, a company is born, has been in production and operations for many years, and needs to grow to a size where they determine they have the resources and structure to be ready for an IPO and the requirements of a public company (disclosure, minimum earnings, shareholder structure, etc.).
Despite the popularity and growth in the number of SPACs, academic analysis shows that investor returns on these companies after mergers are almost always negative. Those who invest in the SPAC and the merged company before the new deal can often earn outsized returns.
SPACs have been around for decades, but their popularity has skyrocketed in recent years, tied to the economic bubble. In 2020-2021, these deals attracted high-profile names such as Goldman Sachs, Credit Suisse, Deutsche Bank and other prominent retired or soon-to-be-retired executives.
According to statistics from the market tracking platform SpacInsider , in 2020, 247 SPACs were created. By 2021, the market had 613 SPAC IPOs, a record number. This is more than 10 times more than the 59 SPACs launched in 2019.
In terms of investment value, SPAC IPOs raised $13.6 billion in 2019, more than four times the $3.5 billion raised in 2016. Interest in SPACs has increased in 2020 and 2021, with $83.4 billion and $162.5 billion raised, respectively.
The appeal of SPACs has been waning since 2022, as the SEC has issued new accounting rules to increase oversight since April 2021 and investment performance has been weaker than expected. The SEC also issued an investor warning in March 2021 when many celebrities, including entertainers and professional athletes, rushed to invest in SPAC deals. The agency warned investors not to make investment decisions based solely on celebrity involvement.
These factors have reduced the total amount raised by SPACs in 2022 to just $13.4 billion, down more than 10-fold in just one year. Since the beginning of the year, SPACs have raised nearly $2.8 billion in 21 deals, showing a continued downward trend.
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