SPACs have existed for a long time, but they are currently experiencing a renaissance after a troubled history. Created in the 80s of the 20th century and tracing back their origin to the blank check companies, in the first decade they gained a reputation of penny-stock frauds as scams and financial scandals multiplied.
SPACs have served as last resorts for small businesses that would otherwise struggle to raise capital on the open market. Recently they have gained a lot of attention, especially since the start of the Covid-19 pandemic, taking off from just 59 created in 2019 with $13.6 billion invested to 613 created in 2021 with $162.5 billion invested. Due to market volatility and the fear that it could jeopardize their public debut, many companies decided to delay their public official offerings (IPOs), while others, on the other hand, chose to merge with a SPAC as an alternative route.
So, what is a SPAC? The acronym stands for Special Purpose Acquisition Company. It is also known as a “blank check” shell company as it has no business operation: in fact, it produces no goods and it sells nothing. The aim is to raise funds through an initial public offering (IPO) and to merge with an already operational private company in order to bring them publicly listed on the stock market.
SPAC investors are investing blindly as they don’t know what company they will end up investing in. Thus, their decision to invest mainly depends on the people running the SPAC, called sponsors, who are experts of a specific industry or business sector.
With the increasing use of SPACs as a way for private companies to go public in a shorter period of time than the traditional way, regulators are keeping a close eye on the phenomenon. In the United States, SPACs are regulated by the Securities and Exchange Commission (SEC), and they are filed under a registration statement, that requires full disclosure of the SPAC structure, including target industries, potential conflicts of interest, complete financial audit.
Since SPACs are SEC registered and are publicly traded companies, the public can purchase their shares prior the business combination. Thus, they have been referred to as “the poor man’s private equity funds” by Lora Dimitrova from the University of Exeter Business School. This is due to the fact that they allow ordinary investors to buy units and participate in the acquisition of a company way before it goes public.
After their remarkable explosion in the United States, SPACs are becoming increasingly popular on a global scale. Investors from Europe, Asia and Latin America want to hop on the bandwagon and have a piece of the cut. Furthermore, SPACs based in the United States are looking for acquisitions outside the country, also because there are too many SPACs chasing for target companies. With the US market being crowded, foreign companies with high potential are looking appealing.
