SPAC

A special purpose acquisition company (SPAC) is a type of investment vehicle that has gained popularity in recent years. To understand what a SPAC is, let’s break it down further.

What does SPAC stand for?

SPAC stands for Special Purpose Acquisition Company. It is essentially a shell company that is created by a group of investors, known as sponsors, with the intention of raising funds through an initial public offering (IPO). The main purpose of a SPAC is to acquire an existing operating company within a specific timeframe.

What is a SPAC?

When a SPAC is formed, its sponsors raise funds from the public through an IPO. The money raised is then placed into a trust account, which earns interest until the SPAC identifies a suitable acquisition target. The sponsors have a specified timeframe, usually two years, to identify and complete an acquisition. If they fail to do so within the specified timeframe, the SPAC is liquidated, and the funds are returned to the investors.

The sponsors of the SPAC typically have expertise and experience in a particular industry or sector. They use their knowledge and network to identify attractive acquisition targets that have growth potential. Once a target is identified, the SPAC enters into negotiations to acquire the company.

When the acquisition is announced, the shareholders of the SPAC have the option to either continue holding their shares or redeem them for a pro-rata portion of the trust account. This gives investors the flexibility to choose whether they want to remain invested in the acquired company or exit their investment.

Why do companies choose SPACs?

SPACs offer several advantages for companies looking to go public or raise funds. Here are a few reasons why companies choose SPACs:

1. Simpler and Faster Process: Going public through a SPAC is often faster and less complicated compared to a traditional IPO. SPACs already have funds raised and are actively seeking acquisition targets, which eliminates the need for a lengthy roadshow and marketing process.
2. Access to Expertise: When a company is acquired by a SPAC, it gains the guidance and support of experienced sponsors who have a track record of success in the industry. This can be beneficial for companies that may lack the resources or market presence required for a successful IPO.
3. Certainty of Funds: By going public through a SPAC, companies can have a level of certainty regarding the funds they will receive. The funds raised through the IPO are held in a trust account and can only be used for completing an acquisition or returning the funds to investors if the SPAC fails to find a suitable target.
4. Flexibility for Shareholders: SPACs provide shareholders with the flexibility to either remain invested in the acquired company or redeem their shares. This gives investors the option to exit their investment if they are not satisfied with the acquisition or the future prospects of the company.

What are some examples of SPACs?

To better illustrate how SPACs work, here are a couple of examples of well-known SPACs and their acquisitions:

• Chamath Palihapitiya’s Social Capital Hedosophia: Social Capital Hedosophia is a series of SPACs founded by venture capitalist Chamath Palihapitiya. One of their notable acquisitions was the merger of Virgin Galactic, a space tourism company, with Social Capital Hedosophia Holdings Corp.
• Bill Ackman’s Pershing Square Tontine Holdings: Pershing Square Tontine Holdings, led by billionaire investor Bill Ackman, is one of the largest SPACs to date. It raised over $4 billion in its IPO and is currently searching for an acquisition target in the technology sector.

These examples highlight the diversity of industries that SPACs operate in and the potential for companies to find partners and investors through the SPAC structure.

What is the conclusion?

In summary, a SPAC is a special purpose acquisition company that is formed to raise funds through an IPO and acquire an existing operating company within a specified timeframe. SPACs offer a simpler and faster alternative to traditional IPOs and provide companies with access to expertise, certainty of funds, and flexibility for shareholders. As SPACs continue to gain popularity, they are likely to play a significant role in shaping the future of the financial markets.

Author: Gunnar Jaerv is the chief operating officer of First Digital Trust — Hong Kong’s technology-driven financial institution powering the digital asset industry and servicing financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Hong Kong-based Peak Digital and Elements Global Enterprises in Singapore.