A Special Purpose Acquisition Company (SPAC) is a type of publicly traded investment vehicle that is created specifically to acquire or merge with another company. SPACs are also sometimes called “blank check companies” because they are set up with the sole purpose of raising capital through an initial public offering (ipo) to later identify and merge with an existing private company.
- SPAC formation: A group of investors creates a SPAC with the intention of raising money through an IPO.
- IPO and unit issuance: The SPAC is listed on a stock exchange, and investors are issued units consisting of one common share and a fraction of a warrant.
- Escrow account: The money raised from the IPO is placed into an escrow account until the SPAC identifies a target company to merge with.
- Target identification: The SPAC has a limited time frame (usually two years) to identify and merge with an existing private company.
- Merger negotiation: The SPAC negotiates the terms of the merger, which can include cash, stock, or a combination of both.
- Shareholder approval: If the merger is approved by shareholders, the target company becomes a publicly traded company through the SPAC's existing stock exchange listing.
- Funds returned: If the SPAC fails to identify a target company within the allotted time frame, the funds are returned to investors.
Overall, SPACs can provide an alternative route for private companies to go public and raise capital. However, they also come with potential risks, such as the uncertainty of the target company's financial performance and the possibility of dilution of existing shareholder value.
There have been many companies that have had successful SPACs. Here are a few examples:
- Virgin Galactic (SPCE): This is one of the most high-profile SPACs to date. In 2019, Richard Branson's space tourism company, Virgin Galactic, merged with a SPAC called Social Capital Hedosophia. The merger valued the company at $2.3 billion and helped fund the development of its spacecraft.
- DraftKings (DKNG): This sports betting platform merged with a SPAC called Diamond Eagle Acquisition Corp in 2020. The merger valued the company at $3.3 billion and helped it go public without the traditional IPO process.
- Opendoor (OPEN): This online real estate platform merged with a SPAC called Chamath Palihapitiya's Social Capital Hedosophia II in 2020. The merger valued the company at $4.8 billion and helped it go public.
- sofi (SOFI): This online personal finance company merged with a SPAC called Social Capital Hedosophia V in 2021. The merger valued the company at $8.7 billion and helped it go public.
- 23andme (ME): This consumer genetics company merged with a SPAC called vg acquisition corp in 2021. The merger valued the company at $3.5 billion and helped it go public.
- Skillz (SKLZ): This mobile gaming platform merged with a SPAC called Flying Eagle Acquisition Corp in 2020. The merger valued the company at $3.5 billion and helped it go public.
- Rivian (RIVN): This electric vehicle manufacturer merged with a SPAC called Rivian Automotive LLC in 2021. The merger valued the company at $67.6 billion and helped it go public.
- Tilray (TLRY): This cannabis company merged with a SPAC called Privateer Holdings in 2018. The merger helped the company go public and created one of the largest cannabis companies in the world.
These are just a few examples of successful SPACs, but there are many others. SPACs have become an increasingly popular way for companies to go public, particularly in industries like technology, where there is high demand for new listings. However, it's worth noting that not all SPACs are successful, and investors should carefully evaluate the potential risks and rewards before investing in a SPAC.
There have been several SPACs that have failed to deliver value to investors or have faced challenges along the way. Here are a few examples:
- Nikola (NKLA): This electric vehicle company merged with a SPAC called VectoIQ in 2020, but it faced significant challenges in the months following the merger. The company's founder was accused of fraud, and its stock price plummeted. The company has since been sued by investors, and its future remains uncertain.
- Lordstown Motors (RIDE): This electric truck company merged with a SPAC called DiamondPeak Holdings in 2020, but it has faced a series of setbacks since then. The company's CEO and CFO resigned in June 2021, and the company has been accused of misleading investors about the state of its production plans.
- QuantumScape (QS): This battery technology company merged with a SPAC called kensington capital acquisition corp in 2020, but it has faced questions about the viability of its technology. The company's stock price has been volatile, and it has been accused of misleading investors about the progress of its research.
- MultiPlan (mpln): This healthcare cost management company merged with a SPAC called Churchill Capital Corp III in 2020, but it has faced questions about its financial performance and accounting practices. The company's stock price has plummeted since the merger, and it has been sued by investors.
- velodyne lidar (VLDR): This lidar technology company merged with a SPAC called Graf Industrial Corp in 2020, but it has faced challenges in the months since the merger. The company's founder was ousted in 2021, and the company has faced questions about the accuracy of its financial statements.
- Clover Health (CLOV): This health insurance company merged with a SPAC called Social Capital Hedosophia Corp III in 2021, but it has faced questions about its business model and accounting practices. The company's stock price has been volatile, and it has been sued by investors.
- XL Fleet (XL): This vehicle electrification solutions company merged with a SPAC called Pivotal Investment Corp II in 2020, but it has faced questions about the accuracy of its financial statements and its ability to compete in a crowded market. The company's stock price has plummeted since the merger.
These are just a few examples of SPACs that have faced challenges or failed to deliver value to investors. It's worth noting that investing in SPACs can be risky, and investors should carefully evaluate the potential risks and rewards before investing in a SPAC.
What does it take to be successful?
- Experienced team: You will need a team with experience in both the industry your company operates in and in SPACs. This includes a strong management team, as well as experienced legal, financial, and accounting advisors.
- Strong financials: To attract investors, your company will need strong financials, including a solid business plan, revenue growth potential, and a clear path to profitability.
- Investor network: To raise capital for your SPAC, you will need to have a strong network of investors who are interested in your company and willing to invest in your SPAC.
- Market opportunity: Your company's SPAC will need to be attractive to investors, which means it should be operating in a market with significant growth potential and a large addressable market.
- Transparency: To maintain investor confidence, you will need to be transparent about your company's financials, business plan, and operations. This includes providing regular updates to investors and being responsive to their questions and concerns.
- Timing: Timing is key when it comes to SPACs. You will need to launch your SPAC at a time when the market is favorable and there is investor demand for SPACs in your industry.
- Strong partnerships: To increase the chances of a successful SPAC, it may be beneficial to form partnerships with other companies or investors in your industry. This can help you to leverage their expertise, network, and resources.
Overall, a successful SPAC requires careful planning, a strong team, and a well-executed strategy. It's important to work closely with experienced advisors and investors to ensure that your SPAC is set up for success.