What is Spac (Special Purpose Acquisition Company)?
An SPAC is a company formed solely to raise capital via an initial public offering (IPO) and acquire existing businesses. However, a SPAC like a public offering (IPO) entails creating new investors, working with different underwriters, filing various securities forms, and at the end of the day, setting up a publicly traded company. However, with regard to the same components, there are various types.
For investors, there is a big difference in the investment that matters. When a company is going through an IPO, investors are entrusting in the knowledge and experience of the company; in a SPAC, they’re investing in trust and knowledge.
How Does Spac Work?
SPACs are usually formed by investors or business/industry experts who seek to enter into new business opportunities. Although founders may have one or several acquisition targets in mind, the target is not explicitly identified so as to allow for lessening disclosure during the IPO process. (These companies are referred to as blank checkbook companies, as there is no way to know what company they are in once they have been purchased.) SPACs looks for underwriters and institutional investors before going public.
The funds raised in an IPO are placed in a trust account that pays interest Only to fund purchases or investor redemptions can these funds be dispensed unless the SPAC is liquidated. An SPAC is in danger of being dissolved if it does not complete a transaction within two years of signing. Some trust interest received by the SPAC can be used as its capital. Following an acquisition, a SPAC usually goes public on the major exchanges.
SPAC Explained!!SPACs are simply mergers/acquisitions to acquire private firms that have no intention of generating any long-term value
IPO VS SPAC
A SPAC is mainly a collective of shareholders with capital investments in mind This is called a shell corporation or “blank check” corporation Investors, usually well-known and well-respected, go public and then search for a business to purchase. The target company must be approved by the shareholders and the regulator. After that, the acquired company becomes a subsidiary of the parent which is already public, and two companies become one. The name of the acquired company will be included in the ticker symbol and approved by regulators and shareholders.
This contrasts with an IPO, which involves developing a product, filing SEC documents, and anticipating a successful listing on the stock exchange would raise capital for further business development.
Another difference in the type of IPO is the duration of the regulatory requirements. Since different SEC filings vary, the SPAC IPO process takes eight weeks. in a typical IPO offering, the prospectus focuses on the past, sales, and assets; in a SPAC offering, the document focuses on the managers or sponsors.
How does the SPAC’s acquisition process work?
The IPO is the moment when the company is transformed from a private to a private public enterprise to normal companies through the traditional IPO process. After a SPAC has a public IPO, there is only a shell company and now the shell company begins to seek a company to buy it. After a new SPAC company has been acquired, the shareholders and regulators have approved it, the process of De-SPACing is commenced by a combination of the shell company and the private company and the newly acquired company is made public under the acquired company’s name.
Important things that investors should know about SPAC
Sponsors(management team) can profit a lot from SPAC.
They are rewarded for the success of the SPAC by joint ownership, which is known as promote.The promote allows sponsors to purchase 20% of the outstanding shares at a significant discount.There can be a significant difference in pay between investors and sponsors.Moreover, The vast number of sponsor shares sold at a low price dilutes investors’ worth. Because they are not investing the same amount. Sponsors are not compensated until the company performs well.