7-pointers on SPACs — Redefining IPOs

With the evolution of financial markets, two things can be evidenced: 1) Complex Tech and data-driven products; 2) New forms of Business entity to create a marketplace for such product companies

One such is SPACs.

The term SPACs is all over the place, with Billionaires like Chamath Palihapitiya are deep into it.

1) So what are SPACs?

SPACs or Special Purpose Acquisition companies or Blank Check Company are shell companies that raise money from investors by getting listed on a stock exchange.

2) Why it raises money and what purpose it serves?

SPACs are required to acquire an existing private company within a fixed period (generally 18–24 months) from its formation. The investor’s money is used to carry out such an acquisition. Post-acquisition such a private company becomes a listed company.

3) What if SPACs are unable to find any private company with 24 months?

In such an event, the investors’ capital is redeemed which means the investor’s capital is protected.

4) How does it helps private companies?

In absence of SPACs, the private company would opt for the traditional IPO route for being listed, spend a lot in PR and media to grab investor’s attention, which would create a hassle.

5) Why would an investor put money in a shell company?

SPACs are led by a group of sponsors who raise money from investors. So investors basically rely on the quality of sponsors and their track record for their investments.

6) Which type of companies choose SPACs over an IPO?

SPACs are ideal for early-stage companies, which are more futuristic, the potential viability of the idea has been tested but it will take time for revenue and profits to kick in.

7) What does an investor gets?

Initially, an investor gets units in SPACs, which later gets separated into stocks and warrants. The warrants bear an offer to buy more stock at a later date.

SPACs has redefined the listing culture in the US and Europe, although India is yet to embrace it.