There is a lot of talk about SPACs this year, but what are they? Why are they so popular?
Definition: SPAC (Special Purpose Acquisition Company)
A special purpose acquisition company, or SPAC is a company that does not have commercial operations. It is formed purely to raise capital through an IPO for the purpose of acquiring an existing company.
SPACs were invented in the early 1990s as a way for investors to invest in a company with experienced management. It allows investors to safely harbor their investment. A special purpose acquisition company has the intent of eventually buying or merging with another company. This is beneficial to fund the future growth of that company.
Also known as a “blank check” company, the intent behind a SPAC is to take a private company public and avoid the traditional IPO listing process. It has also gained the title of the reverse initial public offering or IPO.
Special purpose acquisition companies have some advantages over a traditional IPO. A main advantage is that the timeline for a SPAC is typically 3-4 months versus a year for a traditional IPO. SPACs are also able to outline projections for future revenue growth whereas IPOs can only is disclose previous results. They have also become popular because the target for a SPAC is typically a high growth opportunity in the future. Conversely a drawback is that a SPAC may not find a great acquisition target.
In 2020 SPACs rose to extraordinary popularity and the trend is expected to increase or even accelerate in the future. Virgin Galactic and DraftKings are two notable SPACs from the year 2020.
Retail investors are interested in SPACs for several reasons. They offer a shorter timeline for profit growth than a traditional IPO. They also generate a lot of hype around acquisition targets and are prime for speculation.
Popular SPACs of 2021
“I know there has been a lot of hate for SPACs, but several of them do look juicy.”
“Wall Street Bets should reach out to a whale and set up our own SPAC!”
“Here is a list of SPACs that are going to the moon!”