To those unfamiliar with a SPAC – a Special Purpose Acquisition Company, also known as a blank check company, it is a shell company with no commercial operations, which raises capital from public markets with the aim of later merging with a private company that wants to go public. When the merger is announced, shareholders can either accept stocks in the new company or redeem their shares at the original price of the offering.
In the US, 46% of the USD 103 billion raised in IPOs so far in 2020 went to SPACs.
The attractiveness of SPACs
SPACs are appealing to private companies as the listing process is much faster than with a traditional IPO – there is no need for a roadshow with a SPAC, which is typically needed for IPOs; and therefore, companies spend USD 750,000 and 18 months on average preparing for an IPO.
A special purpose acquisition company may serve as a suitable alternative to traditional IPOs when time, capital, or market conditions are more constrained.
Avoiding roadshows and generally speeding up the process is generally appealing for hyped businesses, but is probably particularly appealing during the current pandemic and might be part of the explanation of the noticeable increase in SPACs.
When major players choose SPACs
In the 80s, reverse mergers, of which SPACs are a type of, were very popular. However, in 2011, the SEC (the American Securities and Exchange Commission) issued a fraud warning, urging caution when investing in companies that went public through reverse mergers.
This reputation has obviously had an effect on SPACs as well, but recently we have seen major players explore the opportunities of SPACs, which is very likely to have removed some of the stigma related to SPACs.
Branson is making his first foray into an increasingly popular form of investment vehicle, and one he himself tapped in order to list Virgin Galactic.
Some of the examples are Richard Branson’s VG Acquisition Corp., as the SPAC will be known, which plans to raise USD 400 million by selling 40 million units at USD 10 apiece, DraftKings, whose valuation has surged from about USD 3 billion to more than USD 13 billion after going public through a SPAC in April 2020, as well as Bill Ackman’s Pershing Square Tontine Holdings, which raised USD 4 billion to become the largest SPAC in history.
Time will tell if the entering of major corporations on the SPAC scene will make SPACs mainstream beyond the pandemic.