When companies want to avoid the long and arduous Initial Public Offering (IPO) process of regulatory review when listing on public markets, a viable alternative may come in the form of a Special Purpose Acquisition Company (SPAC). SPACs are blank-check companies created by private investors to acquire an existing business in New York. Here’s how they work.
Business executives and investors with a track record of negotiating acquisitions, operating companies and raising capital can come together to form a SPAC. They do this by going through the process of filing a registration statement with the U.S. Securities and Exchange Commission (SEC) and being listed on a public stock exchange.
Once launched, a SPAC begins its search for potential acquisition targets. The management has up to two years to find an appropriate purchase that meets certain criteria. For instance, the target must be a profitable and well-managed company with an established record or one that has the potential to develop into a leading player in its industry. Once found, the SPAC sponsors or founders, as well as the target’s management, can negotiate a deal.
The founders and sponsor must also raise additional funding from institutional investors in order to complete the acquisition. The SEC will list the combined entity on a public exchange, such as the NYSE or NASDAQ, under its new name. All existing shareholders of the SPAC will own shares in the newly combined entity.
Benefits of SPACs
SPACs offer several benefits, the most prominent of which is a faster and less painstaking path to going public, circumventing the traditional IPO process. This means less procedural red tape and potentially lower costs. Also, the target company gains the benefit of the SPAC sponsors’ expertise and experience in business formation and management.
Moreover, SPACs offer the target company greater pricing certainty than an IPO, where market volatility could lead to pricing and valuation uncertainties. Hence, SPACs can provide greater value to the target company while offering shareholders of the combined entity a growth opportunity.
While the benefits of SPACs are numerous, it’s important to consider the potential risks as well. A SPAC’s success largely depends on its sponsors’ acumen and expertise in identifying and acquiring a profitable target. Still, it can prove to be a viable option for companies looking to make a public listing without the traditional IPO process.