WTF is a SPAC?

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Did you see this in the news?

SPACs—or, special purpose acquisition companies, are taking the financial world by storm. You may have seen headlines like: "Bill Gates' SPAC is going to go public with huge numbers!" or "Trump is the newest public figure going into the SPAC world!!!" (Okay, so maybe not these exact headlines, but something similar).

But what are SPACs? That's what we'll be breaking down today.

WTF are SPACs?

Traditionally, when a company wants their shares to be traded on public exchanges (so that non-institutional investors like you and me can buy those shares), that company goes through an IPO, or initial public offering, process. This is the usual path for a company to "go public" as we say in the biz.

SPACs have shaken up this process and allowed companies to go public in a new, hip way. It goes like this: SPACs are essentially shell companies that are created to go through the IPO rigamarole, with the goal of eventually acquiring another company (referred to as the “target company”) that wants to be publicly traded. I know this sounds sketchy. When most people hear “shell company,” they think of money laundering; but SPACs are legit, I swear. Many big companies have gone public by merging with SPACs, like WeWork, Virgin Galactic, and DraftKings.

With a SPAC, the shell company doesn’t have much going on. It’s not making rockets or putting kombucha bars into workspaces. Typically, the shell company doesn't make anything, or sell anything; rather, its sole function is to raise money through an IPO, and acquire the target company. It’s sort of like a Trojan horse situation. The shell company is the wooden horse that gets onto the stock exchange. Later, the target company emerges from the wooden horse, straight into the stock exchange, without having to jump through the IPO hoops themselves.

Here's where it gets interesting...

When a SPAC goes public, investors buy shares of the SPAC without knowing what the target company will be. In other words, they do not know what they’re investing in. That’s why you may hear some people refer to SPACs as “blank check companies,” not because the “amount” field would be blank, but rather the “recipient” field.

But SPAC investors aren’t flying completely blind; they are guaranteed some assurances. All of the money raised from the purchases of the SPAC’s shares gets deposited into a trust account. Yes, SPACs are trust fund babies. Not only is that trust account growing through increasing deposits from investors, but it also grows by accruing interest. Then, it’s a bit of a waiting game until the SPAC finds the right company to acquire. Once that company is found, the SPAC will use the money from the trust fund to make the acquisition. Once the merger is complete, the investors who bought shares can either do a little switcheroo and convert their SPAC shares into the newly merged company’s shares, or they can cash in on their SPAC shares and get the money they put down, plus whatever interest grew in the trust.

So being a SPAC investor is a bit of a gamble because you may not know what acquisition will take place, but you do know an acquisition will happen. A SPAC can’t just take investor’s money and keep it in the trust forever. You and I wouldn’t be able to just say, "Hey y’all! Invest in The Money Minute SPAC! We’re going to have an amazing acquisition, just you wait and see!" And then use that money to take a trip to Bali. Nope, that won’t fly (unfortunately. SPACs promise investors that they’ll find a target for the acquisition within a certain timeframe, typically two years. If the SPAC misses that deadline, investors get their money back with interest. I suppose we'll have to fund our Bali vacation some other way...

xo,

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