SPACs - What is It?
SPACs - or Special Purpose Acquisition Company’s has been a major investment theme of 2020. Companies like Nikola Corporation (NASDAQ: NKLA) and Playboy Enterprises are names that have headlined some of the recent SPAC talk. Despite their current popularity, many investors are still discovering them. Here’s your primer on Special Purpose Acquisition Companies.
A traditional initial public offering (IPO) is a company that has a functioning business and are looking to raise capital to grow their business. That is not the case with SPACs. These companies are raising funds through an offering in order to acquire a company someday.
They leave their acquisition targets open, but the area of interest typically matches the expertise of management. There isn’t a business of any kind, just a management team taking stewardship over the funds. It’s this structure that has led SPACs to be referred to as “blank check companies.”
SPACs Gaining Popularity
SPACs - While these entities have been around for many years, they have gained popularity in recent years. 2019 was a banner year for issuance as SPACs raised a record amount of cash. In 2020, over 50 SPACs have launched and raised $21.5 billion as of the beginning of August.
Popularity and issuance have grown so much that Defiance NextGen SPAC Derived ETF (NYSE: SPK) began trading yesterday. The launch of an ETF product will likely attract even more money to the market.
Looking at Nasdaq’s IPO calendar, five SPACs IPOs set for the first two days of October. These IPOs will raise over $2.1 billion. These companies typically price at $10 and trade on the NASDAQ Capital Markets. Here’s a listing of these recent IPOs:
October 1, 2020
· Recharge Acquisition Corp. (NASDAQ CM: RCHGU)
· IG Acquisition Corp. (NASDAQ CM: IGACU)
· Altimeter Growth Corp. (NASDAQ CM: AGCUU)
October 2, 2020
· AEA-Bridges Impact Corp. (NASDAQ CM: IMPXU)
· IG Acquisition Corp. (NASDAQ CM: IGACU)
SPACs Risks
Since these companies don’t really have a business or even disclose an acquisition target, it leads to a more streamlined process to become a public company. A lack of extensive disclosure requirements should be an area of concern for investors.
Many were critical of NKLA for using a SPAC acquisition to become a public company. Acquisition allowed them to avoid the scrutiny that Hindenburg Research later raised, which led to their CEO stepping down.
Conclusion
SPACs - It’s uncertain whether the surging popularity of SPACs is a sign of an aging bull or a path forward. It will take time to sort that out. However, it’s important to be aware of what they are and become an investment for some speculative investors.