Special Purpose Acquisition Company (“SPAC”)

Hi everyone,

Hope this blog finds you all doing great and getting back to some type of normalcy. For this month’s blog, I had to decide which topic to discuss as there were many to choose from the firing of the Chairperson of the Public Company Accounting Oversight Board to the new potential amendment on multi-layer hedging.  Instead, I decided to write about Special Purpose Acquisition Companies (“SPACs”) just like everyone else is. These SPACs, which are also known as blank check companies, have been in the press almost everyday due to its popularity in converting private companies  to publicly traded with both less red tape and fees that are usually associated with the traditional IPO route.  What makes this different is that unlike typical IPOs where companies have a track record, these SPACs start out as a shell company when it becomes public. As an early-stage investor in a SPAC, one is relying on the management team (aka “Sponsors”) that formed the SPAC to acquire or combine with an operating company. Once the SPAC finds an opportunity for acquisition, it will then proceed to negotiate with the company management. Usually, SPAC shareholders must approve the business combination before it becomes reality. In the initial formation of a SPAC IPO, the proceeds received less certain fees and expenses, are held in a trust account. Similar to a typical escrow arrangement, the money is held by a third party until the acquisition transaction is consummated.  In the IPO, SPACs are typically priced at a nominal $10 per unit. Unlike a traditional IPO of an operating company, the SPAC IPO price is not based on a valuation of an existing business. Usually, a SPAC IPO is often structured to offer investors a unit of securities consisting of (1) shares of common stock and (2) warrants.

Well, does this sound to good to be true?  Today, everyone is on the band wagon forming SPACs.  As we all know, this does not hold well for SPACs and already the US, Congress is planning to make SPACs less advantageous. Until next time………….

Joel