What is a SPAC?

Welcome to this month’s Ask the CFP segment. This month’s question is, “what is a SPAC?” SPACs have existed since the 1990s, but they’ve become quite popular in recent years. SPAC stands for Special Purpose Acquisition Company. The purpose of a SPAC is to acquire a privately held business and allow it to become a publicly-traded company. Typically when a company seeks to go public and begin trading on a stock exchange, it must hire an investment bank to conduct underwriting and analysis and also complete filings with the Securities and Exchange Commission – the SEC. For some, this can sound like an expensive and time-consuming process. SPACs are completely different in that investors buy shares before they even know what company they’ll ultimately own.

With a SPAC, a management team is first established that has experience in a given field, such as technology or manufacturing. This team files with the SEC to become publicly-traded and sells shares through an Initial Public Offering – an IPO. What this essentially means is that people are giving their dollars to the SPAC in return for shares in the SPAC, even though there are no business operations in this entity so far. Then the SPAC’s management team begins looking for privately-owned businesses it can acquire or merge with. Once they find a potential deal, the shareholders in the SPAC vote on the decision. If approved, the SPAC may then acquire or merge with this privately-owned business, thus bringing a new publicly-traded company into the market that the SPAC shareholders own.

You may be wondering why this isn’t the typical way for companies to go public if it’s faster and less costly for the private business. One of the greatest risks with investing in a SPAC is that you don’t know what company they’ll seek to acquire. You have to invest in the SPAC in advance before you know what you’ll own. SPACs are sometimes called “blank check companies” due to this risk. Another risk is that the SPAC management team may never find a company to acquire. They generally agree to a period of time where they can search for an acquisition, such as two years. If they don’t acquire a company in that time period, they must return capital to their investors.

In summary, if you’re an investor, SPACs are an interesting and potentially volatile way to access new companies coming to the markets. Be aware of the risks. If you’re a privately held business owner, SPACs may offer an opportunity to go public and sell shares at a price that’s hard to decline. We’ll likely see SPACs continue to play a bigger role in the markets moving forward.

If you have a question about this topic or have a question for next month’s video, please send it to [email protected] . Thanks and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.?