FAQs: SPACs Explained

What is a SPAC?

A SPAC (Special Purpose Acquisition Company) is a shell company that goes public with the sole purpose of acquiring a private company and taking it public, bypassing the traditional IPO process.

How does the process work?

1. Formation & IPO (Initial Public Offering):
   • A SPAC is formed by experienced managers (sponsors).
   • It goes public through an IPO, raising money from investors, which is held in a trust account.
2. Target Search:
   • The SPAC typically has 2 years to find and acquire a suitable target company.
3. Merger:
   • If a target company is found, SPAC shareholders vote on the merger.
   • If approved, the two companies merge, and the target company becomes publicly traded.
4. Liquidation:
   • If the SPAC fails to find a target company within the timeframe, it is liquidated, and the money is returned to investors (Full Redemption).

IPO and the SEC

• IPO (Initial Public Offering): The process by which a company offers its shares for sale to the public for the first time. SPACs conduct an IPO to raise capital for the subsequent acquisition of a target company.
• SEC (Securities and Exchange Commission): The U.S. securities regulator that oversees and regulates the SPAC process. SPACs must file an IPO application with the SEC and comply with strict disclosure requirements.

Key Terms

Units:

• Units are often issued during the SPAC’s formation.
• They consist of one share and a fraction of a warrant or right.
• Unit Split allows investors to trade shares and warrants/rights independently after the IPO.

Warrants:

• Give the holder the right to buy additional shares of the SPAC or merged company at a certain price within a specific timeframe
• Serve as an additional incentive for investors
• Can be redeemed by the SPAC under certain conditions (Warrant Redemption)

Rights:

• Give the holder the right to receive a fraction of a share of the SPAC (usually 1/10) upon closing of a Business Combination (merger).
• The exact terms and exercise conditions of rights can vary from SPAC to SPAC.

Redemption:

• Shareholders can redeem their shares for the initial IPO price if they disagree with the proposed acquisition

LOI (Letter of Intent):

• Non-binding declaration of intent between the SPAC and the target company regarding a potential merger

Definitive Agreement:

• Legally binding contract detailing all aspects of the merger

What happens in a Merger?

1. Vote: SPAC shareholders vote on the merger
2. Merger: If approved, the SPAC and target company merge
3. Public Listing: The target company becomes publicly traded
4. Conversion: SPAC shares are converted into shares of the merged company
5. Redemption: Dissenting shareholders can usually redeem their shares at the IPO price
6. Rights: Depending on their structure, rights may be automatically redeemed or exercised to receive the corresponding fraction of shares in the merged company.

Risks & Benefits of SPACs

Benefits:

• Faster route to public markets for private companies
• Investors can get in early on promising companies
• SPACs offer more security for investors as the money is held in trust until a target is found

Risks:

• Conflicts of interest between sponsors and shareholders
• Time pressure in the target search can lead to rushed decisions
• Target company valuation can be challenging
• High dilution through warrants and other sponsor incentives

Conclusion:

SPACs offer an alternative way for companies to go public and for investors to invest in these companies early on. However, it’s crucial to understand the risks and complexities of this investment vehicle before investing.