At this point, investors can cash out, or hold on for longer-term gains. A Special Purpose Acquisition Company is a company created solely to merge or acquire another business and take it public — a faster alternative to an initial public offering. Many companies chose to postpone their IPOs (for fear that the market volitlity could spoil their stock’s public debut). But others chose the alternate route to an IPO by merging with a SPAC. If you analyze it simply as a two-party process, you’ll find that the target has considerable leverage, particularly late in the 24-month cycle, because the sponsor stands to lose everything unless it is able to complete a deal. But when you factor original investors into the equation, the calculus changes, because they can reject deals after they’ve been announced.

SPAC returns are based on the appreciation or depreciation of the SPAC shares. The accounting acquirer is the entity that has obtained control of the other entity (i.e., the acquiree) and may be different from the legal acquirer. If the target company is determined to be the accounting acquirer, the transaction will be treated similar to a capital raising event (i.e., a reverse recapitalization). If the SPAC is determined to be the accounting acquirer, purchase accounting will apply and the target company’s assets and liabilities will require a valuation to be stepped-up to fair value (i.e., a forward merger). The target company’s financial statements must be in compliance with SEC reporting requirements. Once shareholders approve the SPAC merger and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity.

The services and products are not available to all customers or in all geographic areas or in any jurisdiction where it is unlawful for us to offer such services and products. SPACs generally look for target companies within specific industries. Investors can choose SPACs in the industry they are optimistic about. It has been a popular way to list a company on a stock exchange in the U.S in recent years.

Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fiduciary duties. The SPAC is further prohibited from consummating a business combination with any entity affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders. When it comes to valuation, SPACs again often offer more than traditional IPOs do. Several months prior to a merger, the parties in a SPAC, including the target, negotiate a capital commitment and a binding valuation .

In a period occasionally referred to as the “blank check boom”, SPACs raised a record $82 billion in 2020 as the favorite source of financing for private companies looking to go public. Once an acquisition is identified, a proxy vote is held for SPAC shareholders to vote in favor or against the acquisition. NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site.

Investor Alerts and Bulletins

For IPOs, companies are permitted to share past financial results and talk broadly about the markets in which they operate, but they are prohibited from projecting future financial performance. In contrast, a company going public via a SPAC deal is allowed to present detailed revenue and profit projections that are forward-looking by five years or more. For young, pre-revenue companies that might prefer for investors to focus on their potential instead of their unimpressive results so far, that regulatory distinction confers a significant benefit.

Private equity is an alternative investment class that invests in or acquires private companies that are not listed on a public stock exchange. An investor in a SPAC IPO trusts that promoters are successful in acquiring or merging with a suitable target company in the future. However, there exists a reduced degree of oversight from regulators and a lack of disclosure from the SPAC, burdening retail investors with the risk that the investment may be overhyped or even fraudulent. For further information about Moomoo Financial Inc., please visit Financial Industry Regulatory Authority ’s BrokerCheck. Brokerage accounts with Moomoo Financial Inc. are protected by the Securities Investor Protection Corporation . Moomoo Financial Inc. is a member of Securities Investor Protection Corporation , which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).

It is important to understand that SIPC protects customer accounts against losses caused by the financial failure of the broker-dealer, but not against an increase or decrease in the market value of securities in customers’ accounts. SIPC does not protect against market risk, which is the risk inherent in a fluctuating market. For further information about SIPC insurance coverage for accounts with Moomoo Financial Inc., see or request an explanatory brochure from Moomoo Financial Inc.

In fact, investors may be able to exercise their warrants and buy more shares at a lower price. Of course, there’s also the possibility the investment could lose value. An important distinction to note here is the different valuation approaches with SPACs and IPOs. A SPAC used to combine the right to vote (i.e., accept or reject a potential acquisition) with the ability to redeem shares. That is, if you voted to reject a deal, you would redeem your shares. In recent years, regulators decoupled those rights (i.e., investors could vote yes or no against a deal and still redeem their shares).

Special Purpose Acquisition Company: What Is A SPAC?

Among the report’s proposals is to reduce the percentage of shares that must be offered to the public from 25 percent to 15 percent. Proliferation of SPACs usually accelerates around periods of economic bubbles, such as the “everything bubble” between 2020 and 2021. “Chase Private Client” is the brand name for a banking and investment product and service offering, requiring a Chase Private Client Checking℠ account.

what is a spac

That process can take at least six months, however, merging with a SPAC can take around 3-4 months. If the SPAC does not make an acquisition within a specified period of time after the IPO, those funds are returned to investors. Subsequent to the IPO, a SPAC may raise additional capital via a PIPE and/or debt financing.

What Is a SPAC? Special Purpose Acquisition Companies Explained

For their investment, investors usually receive SPAC shares plus warrants. A warrant provides an investor with the right to buy additional shares at a later date at a fixed price. SPAC investors vote in a proxy to approve or disapprove a proposed acquisition.

what is a spac

Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. Another study found that between 2015 and 2019, the majority of SPACs were trading below the $10 IPO price. While investors have the right to vote on potential deals brought forth by SPAC managers, a risk for SPAC investors is that they may not like acquisition targets. Consequently, the SEC notes that “the economic interest of the entity that forms the SPAC … often differs from the economic interest of public shareholders, which may lead to conflicts of interest.”

From this point onward, the SPAC trades and behaves like any other listed company, but investors do not disclose a merger or acquisition target. As they are public companies listed on major exchanges, you can invest in SPACs like you can any other publicly traded stock—through your online brokerage account. In a traditional IPO, though, “your ability to get an allocation on IPO shares is just really hard,” McNally notes. SPACs typically must complete an acquisition within a 18 to 24 month timeframe or dissolve and return the assets in escrow to investors. As part of the IPO process, a SPAC often combines shares of common stock with warrants, which gives the holder the right to buy more stock at a fixed price at a later date.

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With a SPAC, requirements aren’t as stringent, and even as a company goes public, a lot of unknowns exist, making it difficult to know if the company has what it takes to survive. Transition to market competition – investors transition from relying on mandatory disclosures to market forces regarding their shares. Going public is a big event for companies, but it comes with a lot of preparation, paperwork, and scrutiny, and once it’s done, it can be a beneficial business decision.

Public company readiness

For example, Chamath Palihapitiya’s SPAC, Social Capital, allowed sponsors to purchase shares for less than a penny per share while regular shareholders purchased shares at $10. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal. A Form 8-K with equivalent information that would be required in a Form 10 filing of the target company (commonly referred to as the ‘Super’ 8-K) must be filed with the SEC within four business days of closing. It’s impossible to know whether an IPO would have raised enough red flags about Nikola for investors, but, in hindsight, clearly insufficient due diligence was conducted prior to the SPAC merger being completed.

Company About Discover how we’re making the markets work for all investors. Finally, as with any investment, investors should weigh the opportunity costs. That being said, sponsors don’t get paid unless the SPAC performs well.

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