A Special Purpose Acquisition Company may provide a workable plan for a business hoping to sell itself or raise capital. Also referred to as blank-check companies, creating one could serve as a means to obtain funding from investors to enable a merger or acquisition involving another private business.
SPACs typically attract investors through an initial public offering. As noted by the Financial Industry Regulatory Authority, SPAC securities may initially trade between $6 and $10 per unit. An escrow account holds its investors’ funds until it merges with its target company.
How companies may qualify to form SPACs
SPACs generally will not have an established operating history. The entity does not engage in commercial operations such as selling products or services. Investors may instead find an attractive opportunity based on the professional reputation of the individuals creating the SPAC.
The benefits of forming SPACs include access to a larger network of investors without needing to withstand a demanding due diligence process. Managers, for example, do not need to provide documents showing a record of accomplishment in mergers or acquisitions. Managers’ efforts may lead to a public company in less time and with fewer reporting requirements than a traditional IPO.
SPAC requirements after an IPO
As reported by CNBC, after launching as a public entity trading on a stock exchange, SPACs must identify and complete a merger or acquisition within two years. If they fail to follow through, their initial investors may get their original investment back. The company that formed the SPAC, however, may lose the time and money that its managers put into it.
According to SPAC Research, in the first half of 2021, 330 SPACs raised approximately $105 billion to take private companies public. SPACs may serve as a way for late-stage private enterprises to launch a public company.