WTF IS A SPAC?
CHRIS INCIDENT - STASIS
Morning, Chris here to educate you about wtf a SPAC is.
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SPACs are this seemingly new financial thing that all the robinhood hero's and financial bigwigs are all over. Well, in reality they're not that new, they're really just gaining more attention at the moment. This year alone there were 112 SPAC IPOs. Nikola is maybe a flub. Richard Branson is in.
Ok, but what is it?
Special Purpose Acquisition Company. In a nutshell, it's basically a publicly traded firm that has no operations, no assets, other than a shit load of money and one stated business plan: buy another company.
Who runs these things?
Often times the media reports on famous investors. Bill Ackman is a good example. He is billionaire founder of Pershing Capital. He’s one of a bunch of people who have formed the shell companies that do the acquisitions
How does this work? Here's the gist.
- Human X or 'X' decides they want to make a SPAC.
- X goes to a bunch of investors and raises money for said SPAC.
- SPACs are usually priced at $10 for a share and a warrant or fraction of a warrant, which is a document that gives the investor the right to buy a share at a specific price after the merger. So if you bought into X's SPAC, you get a share and the possibility of buying more.
- X has usually about 18 months then to find a new company to acquire.
- If X doesn't find a company, usually they just give the money back minus maybe some fees.
- X finds their company (congrats x!). When X signs the purchase agreement, all the investors will either vote or engage in a tender offer; the outcome is roughly the same. In either case, the investors can either return their shares to me (in which case, they get most or all of their money back) or they are now the proud owners of whatever X decided to buy.
What are the benefits?
- Participating in the SPAC is low-risk. If an investor doesn’t like the target X picks, they can simply get their money back.
- They're cheap. "Many SPACs are priced at $10 a share, well within reach of retail investors. And they stay low for a while." - BI
- They invest in "sexy" areas like tech and consumer products.
- The due diligence required for a merger may be less than what the Securities and Exchange Commission requires for a regular IPO.
- In order to do an IPO, you typically pay an investment banks 1 percent to 7 percent of what you raise. With a SPAC, the underwriter gets 5.5 percent and there may be other fees associated with the merger. "SPAC fees are about a quarter of the money raised, three or four times as much as you’d pay in an IPO, albeit better disguised,” Levine writes.
- SPACs have a bad reputation when it comes to fraud.
Can you give me examples?
- Blank-Check Firms Offering IPO Alternative Are Under Regulatory Scrutiny
- SPACS, Explained - SPAC The Final Frontier
- ‘Blank-Check’ Companies Are Hot on Wall Street. Investors Can’t Ignore Them.
- What is a spac?
- SPACs Aren’t Cheaper Than IPOs Yet
- Can SPACs shake off their bad reputation?
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