SPACs or Special Purpose Acquisition Companies are formed to raise money through an Initial Public Offering or IPO so that it can buy an existing private company. An Initial Public Offering is the most common way of taking a privately owned company public. The end result of taking a private company public is that it gets traded on one of the stock exchanges, so that shares of ownership in that company can be easily bought and sold. Investors can be anyone from institutional investors, private equity funds and sometimes even the general public. Typically, investors and other people familiar with a specific industry will form a SPAC because they have a plan to buy a company, or companies, in their area of expertise. Normally these target companies are private. They start raising money for an acquisition before they even know what business they are buying. Once they raise the money, they have a two years to complete a deal or liquidate and return the money back to the investors. While they are hunting for a deal the money is kept in an interest bearing trust account. The SPAC itself is a public company without any business operations because their only reason for existing to buy another company. This is why SPACs are often referred to as blank cheque companies. Once the SPAC buys the target company, it will change its stock ticker to align with the company it purchased. SPACs are not new but they have become more popular recently because they have a shorter and easier process compared to a traditional IPO of a company going public.
Richard Branson’s Virgin Galactic (NYSE: SPCE) was involved in a high profile merger deal with a SPAC formed by Chamath Palihapitiya’s Social Capital Hedosophia. It bought a 49% stake in Virgin Galactic for $800 million before going public and listing the company on the NYSE in 2019. Social Capital Hedosophia’s second SPAC merged with Opendoor Technologies Inc. (OPEN), a company that buys and sells residential real estate. At the time of publishing this blog, Social Capital Hedosophia has two other SPACs looking for targets.
The electric truck company Nikola Motor (Nasdaq: NKLA) came about, in early June 2020, from a merger with VectoIQ Acquisition. Other electric vehicle companies that have gone public through SPACs include Hyliion Holdings Corp. (HYLN) and Fisker Inc. (FSR).
Bill Ackman is a well-known hedge fund manager and billionaire that sponsored his own SPAC called Pershing Square Tontine Holdings, Ltd. (PSTH) that is working on raising $5 to $7 billion. It is an available SPAC with no acquisition target identified at the time this blog was published. You can find out more by visiting their site at https://pstontine.com/ .
Some of these SPACs have done really well and other have had difficulties, like the much-publicized issues with Nikola.
How can you invest in some of these SPACs? Realistically the early investors are the underwriters, hedge funds and institutions but individual investors like you can get in fairly early. There are allot SPACs listed today on the New York Stock Exchange (NYSE) that range from ones that are looking to buy fintech companies to health care companies. Chances are you will be able to find a SPAC for any popular trending investment opportunity. If you go to www.nasdaq.com and search for “SPAC you will be able to find a bunch of companies.
Investing in a SPAC is investing in the unknown which comes with allot of risks and is speculative play. Earlier I mentioned Pershing Square Tontine Holdings, Ltd. (PSTH) which is still looking for a target. I also found Defiance NextGen SPAC IPO ETF (SPAK) which is an ETF who’s “structure allows investors to access the most liquid SPAC IPOs in a diversified basket”. Be aware that with SPACs, you will be potentially tying up your money for some time with the hopes that they buy a high growth company which are in themselves risky. You are betting on the people that have sponsored the SPAC so you want to be sure that they can deliver on their promises. That being said they are risky so you should consult your financial advisor before making a buying a SPAC.
Disclaimer: I am not a licensed financial advisor. This is not a solicitation to buy or sell a specific security nor is it to be construed as investment advice, please contact your licensed financial and tax advisor for advice to your specific situation. I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article/blog.