Investors making a deal

What is a SPAC?

As one of the hot investment ideas in the current market, you may have heard the acronym SPAC lately. A SPAC, or Special Purpose Acquisition Company, is a back door, formally out of favor investment approach to buying new Initial Public Offerings or IPOs. Basically, SPACs are a publicly traded firm that has no operations, no assets other than a pile of cash, and just one stated business plan— to eventually buy another company.

SPACs are created with the sole intent to merge with or acquire another business as a means to take it public. Companies may pursue this route since it’s a cheaper and faster way to an IPO. Investors essentially write blank checks to SPACs, while the SPAC can take up to two years to target and buy another firm. In simple terms, SPACs offer individual investors the chance to get in on the ground floor of a potential hot stock, but they are also risky.

A lot of individuals would love to get in early on an IPO when a company first launches on the stock exchange. However, institutional investors and pension funds typically get to have the first shot at these stocks before they become available to the retail investor.

Group of investors

SPAC’s Are Becoming More Popular

If a SPAC sounds like a situation where abuse can happen, it’s probably because it once was. A lot of fraud surrounded these blank check companies in the 1980s. However, the SEC has tightened regulations and the procedures for these ventures. SPACs now have to register with the SEC, even if they have assets under $1 Million. Basically, investors have to trust that the management of the SPAC will fulfill their intentions. Also, SPACs tend to start cheap, starting at $10 per share. Today, there are hundreds of SPACs available. Now, individual investors have access to SPACs in many of the hot areas of the current market, including technology, healthcare, and more.

An example of a recent SPAC is 23andMe, a consumer genetics company that is going public via a merger with Richard Branson’s SPAC VG acquisition. This deal is said to be valued at over $3.5 billion. However, as we said before, SPACs are a blank check that relies on management to fulfill their promise to the investor. While it can be a quick way to gain access to up-and-coming companies, investors have to keep these risks in mind. In short, buyers beware.
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