Skip to main content

ELI5: What's SPAC?

Image
By




Special Purpose Acquisition Companies. A mouthful, luckily we can just call them SPACs. SPACs skyrocketed in popularity in 2020, raising over $50 billion dollars. More in a single year than in all the preceding decade. 

SPACs are shell companies who's sole purpose is to raise public money to acquire a private company - thus taking it public through the backdoor. SPACs are an alternative to the traditional IPO. 

IPOs can be a hassle, involving a lot of regulatory scrutiny, paperwork and hefty underwriting fees. It can take months to get everything together. SPACs sidestep all this.

SPACs are ran and operated by a sponsor. Sponsors are typically professional investors (hedge fund managers, venture capitalists) but given the recent craze, many celebrities have also entered the chat (that's always a red flag). 

Investors have no idea who'll be acquired. They're betting solely on the sponsor - why they're often called "blank check" companies. Sponsors are given money on confidence alone. 

Sponsors have 2 years to find a company to acquire or will have to return the money. This is good and bad. It's good in that sponsors can't just sit on the money. Bad in that it can incentive them to acquire companies that are less favourable just to close a deal. Sponsors gets 20% of the company they take public. A generous payment they wouldn't want to miss. 

SPACs are a cheap and fast way for companies to go public, and are even a better deal for sponsors. For investors, the value is more questionable. Investors are choosing a mystery box. It could be great, it could be a dud. Who knows?

All investing comes with unknowns, but SPACs takes it to the next level. It's a gamble, it the truest form of the word. 




Labels:

Comments

Post a Comment

Popular posts from this blog

Today's Special: Humble Pie

By
You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...
Post a Comment
Read more

Negative Feedback, Positive Lessons

By
In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study  invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer.  Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong.  "You're right!" feels good. We savour the moment, analyzing every detail.  "You're wrong!" stings. We want to quickly forget, dismiss, and move on.  When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...
Post a Comment
Read more

Starting Really Really Small

By
On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread.  The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can.  To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do.  Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.  
Post a Comment
Read more