SPAC or Special Purpose Acquisition Company – Concept, Working, Benefits & more
Special Purpose Acquisition Company or SPAC is a corporation structured to meet the sole objective of companies aspiring to raise investment capital via IPO.
To simply put, these companies merge with another company or aspire to buy a firm operational in a specific sector for a specific timeframe.
Acquired company going public is the major goal of the SPAC.
You may also refer to it as a shell company or blank check company that focuses more on other companies as SPACs don’t have their own business operations.
They exist on paper only and have no employees or office. This also indicates that the investors are completely unaware of how a company is using their money.
However, SPAC may go public in the stock market earlier, but the announcement for acquisition can be made at a later date.
Now you might wonder how Special Purpose Acquisition Company works and what are its benefits? Get the answer to all such burning questions right over here.
How does a SPAC work?
As we mentioned before, SPAC is a kind of shell company that doesn’t have its own business plan.
These companies can be in their development stage, but they may not have their own asset except cash and passive investments, unlike other companies.
The features of SPAC consider it different than most other IPOs firms. For instance- other companies might be carrying a well-structured business model before covering a trip to IPO.
They may aspire to scale their business via the collected funds through IPO. But this isn’t in the case of SPAC.
Most companies struggle and must prove to the authorities that they are eligible to enter the IPO.
In simple words, the SEBI doesn’t allow every company to enter the stock market if their business doesn’t generate revenue up from 25 crores.
But Special Purpose Acquisition Company may approach IPOs differently by opting out the merger and acquisition with other companies.
Still it often surprises us how SPACs despite being a shell company raise capital via IPO. Here are the leading phases a SPAC go through and make this happen –
Incorporation and Formation
It is the first phase a SPAC goes through before getting its name registered in IPO. The company officially issues and incorporates its founder shares.
Meanwhile, the company may prepare for “S-1 files,” which stands for a company form to be submitted to SEC.
Only after that, the company may proceed with the further steps for IPO. The whole process may take time up to eight weeks.
Research and Due Diligence
This is the second phase in which the SPAC comes up with the target companies that can be selected for the merger or acquisition.
Throughout this second step, the company may thoroughly review the companies.
Once the target company is found, the negotiation process begins, and SPAC continues with the merger and acquisition process.
During this phase, the company may continue lining up its financing.
However, the second phase may take a complete year time and sometimes even more. During this time frame, the IPOs Proceeds of SPAC are sustained in the trust account.
Acquisition or Merger
In the final phase, the company closes its deal for merger and acquisition.
The SPAC reveals the deals and transactions to the public and investors. During this last phase, the SPAC may file an 8-k file.
The 8-K file ensures that the interested parties come to know all the events related to the company, e.g., merger or acquisition event.
Usually, phase three takes time up to 3 to 4 months to get the whole process done.
Similarly, investors who join the SPAC can now become a shareholder of the company or redeem the shares.
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Benefits of SPAC
SPAC works as an alternative to the traditional IPO system for companies and investors. There’s no surprise that the company serves everyone in the stock market.
The main parties enjoying the benefits of SPAC are as follows-
In contrast to private placements, SPACs have access to a slightly larger pool of potential investors when it comes to raising capital via IPO.
SPACs also build an opportunity for aspiring investors to co-invest with some of the best individuals and sponsor firms.
They may even offer protection measures and particular liquidity provisions that ensure investors feel safe by all means.
Businesses may receive most out of their expectations from SPACs because it offers privately-owned companies a striking chance to get exposed to the public market.
Mainly when there is instability in the market. Similarly, businesses can easily fund their operations and carry out the essential procedures on time.
SPACs vs Traditional IPOs
IPOs refer to the process when a company first-time enters the stock market and the first-time issues and sells out its shares to the general public. All these firms operate privately.
That’s why the process is also referred to as a “going public.” On the other hand, SPAC itself goes through an IPO.
Still, it is relatively different in comparison to the traditional IPO process. In a traditional IPO, the company has business operations, whereas, in SPACs, there are no business operations.
But the IPO process is quite faster in SPACs in comparison to the traditional IPO process. Still, unlike traditional IPO, the company goes public predominantly to acquire another firm and raise capital.
We don’t see this in traditional IPO where the company only wants to go public to boost their businesses by raising more capital.
Special Purpose Acquisition Company – Conclusion
In the finals words, we can say that SPAC has its own definition, and it would be wrong to compare it with IPO.
In an initial public offering, companies themselves enter the stock market to fund their capital needs.
Yet SPAC is an instant solution for companies who want to collect instant funds than going directly with IPOs. SPACs don’t carry their own business capital.
They only enter the IPO to raise capital for other companies and fund the acquisition of another business.
That makes it known as a shell company with no inventory or asset, but it works on papers only.
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