What Is a SPAC? Reverse Mergers, Explained

Traditional IPOs are just one way to go public. SPACs are another popular route to the public domain. What is a special purpose acquisition company, and what are the nuances of this unique back-door deal?

The basics: What is a SPAC?

A special purpose acquisition company is essentially a shell company that raises funding from the public to acquire an existing private company. SPACs have a two-year window to take a target public. A SPAC is also required to use 80% of its net assets to purchase the private company. If it fails to do so, the SEC will force the company to dissolve.

Eventually, an existing private company can merge with or be acquired by the publicly traded SPAC and become listed on the stock market as a back door to the public market.

Other names for SPAC deals

SPACs are also known as blank check listings. This is mostly because investors contribute to a company that has no solid business plan, but is instead contingent on a merger or acquisition.

Another term for a SPAC is a reverse merger, because a private company may choose to go public by acquiring a dormant stake in a SPAC.

SPACs have become wildly popular. Here's why

SPAC popularity has gone through the roof. In 2020, there were four times more SPACs than 2019. They have become equally popular in other parts of the world, including the UAE, even though SPACs are not permitted in Middle Eastern bourses (stock exchanges).

SPACs are often quicker and cheaper to implement than traditional IPOs. They can be completed within 2–3 months. IPOs require a lengthy SEC approval process and can cost hundreds of thousands or millions of dollars to implement.

Additionally, employees and institutional investors of blank check firms are not bound by a lockup period as they would be in a traditional IPO setting—yet another perk.

High-profile execs also love SPACs because the process allows them to maintain a significant stake in the company that they would've had to give up if they used a traditional IPO.

Examples of SPACs in the US stock market

Below is a list of recent and pending SPACs as of mid-July 2021:

• Union Acquisition Corp. II to take Procaps Group public

• BowX Acquisition Corp. seeking new target after SPAC deal with Mapbox fails

• Ajax I to take Cazoo public

• dMY Technology to take Planet Labs public

Should you invest in public offerings from SPACs?

You can invest in SPACs pre-or post-acquisition. SPACs come with risk like any other type of IPO, and this largely depends on the private company the SPAC targets.

While SPAC sentiment has become more positive over the last few years, there is a slight risk that the merger will fail before finalized. In the right hands, a SPAC IPO can be exhilarating. But in the wrong hands, it can be a recipe for long lost capital.