Special-purpose acquisition companies (SPACs) have become increasingly popular in recent years, with investors eager to tap into the potential for higher returns. However, SPACs can also be risky investments, and it’s important to understand the risks before putting your money into one.
This guide will discuss the basics of SPACs, the risks involved, and how to invest in them.
What is a SPAC?
A SPAC is a shell company created with the sole purpose of acquiring another company. SPACs are also called bare-bones companies because they have no specific business operations or assets when they are first formed.
SPACs raise money through an initial public offering (IPO), and the proceeds of the IPO are held in trust until the SPAC finds a target company to acquire. Once a target company is identified, the SPAC’s shareholders vote on whether to approve the acquisition.
If the acquisition is approved, the target company is merged with the SPAC and the shareholders of the SPAC own shares in the newly merged company.
Why Are SPACs Popular?
SPACs are popular for several reasons. First, it provides a faster and more efficient way for companies to go public than the traditional IPO process. SPACs can provide target companies with access to a pool of capital not available through a traditional IPO.
Second, SPACs offer the potential for higher returns. If the SPAC can acquire a successful target company, investors in the SPAC can receive a significant return on their investment.
What are the risks of investing in SPACs?
There are several risks associated with investing in SPACs. First, there is no guarantee that a SPAC will be able to find a target company to acquire. If the SPAC cannot find a target company, it will be forced to dissolve and return the money to its investors.
Second, even if the SPAC manages to find a target company, there is no guarantee that the acquisition will be successful. The target company may not be as successful as expected or the merger may not be completed.
Third, SPACs are often criticized for their lack of transparency. SPACs are not required to provide information to investors like traditional IPOs, making it difficult for investors to assess the risks involved.
How to Invest in SPACs
If you’re considering investing in a SPAC, it’s important to do your research and understand the risks involved. You should also consider investing in a SPAC that is led by a reputable management team and has a strong target company in mind.
You can invest in SPACs through a brokerage account. When you invest in a SPAC, you buy IPO shares of the SPAC. If the SPAC can find a target company and complete the acquisition, your shares will be converted into shares of the target company.
How many special-purpose acquisition companies are there?
As of June 2023, there are 750 special purpose acquisition companies (SPACs) in the United States.
What are the most successful SPACs?
The most successful SPACs are those that can find a target company and complete a successful merger. Some of the most successful SPACs are:
- DraftKings (DKNG): This SPAC merged with the Diamond Eagle Acquisition SPAC in April 2020. DraftKings is a leading online sports betting and fantasy sports company.
- Virgin Galactic (SPCE): This SPAC was merged with Social Capital Hedosopia Holdings Corporation in October 2019. Virgin Galactic is a space tourism company.
- Opendoor Technologies (OPEN): This SPAC is owned by Opendoor Technologies Inc. Added December 2020 with Opendoor a real estate company that buys and sells homes online.
- Nicola Corporation (NKLA): This SPAC merged with VectoIQ Acquisition Corporation in June 2020. Nikola is an electric vehicle company.
- Clover Health (CLOV): This SPAC merged with Clover Health Investments Corporation in January 2021. Clover Health is a healthcare technology company.
- It should be noted that past performance is not indicative of future results. SPACs are a risky investment, and there is no guarantee that any SPAC will be successful.
Why do SPACs fail?
SPACs fail for a variety of reasons, including:
- The SPAC was unable to locate the target company to acquire.
- The target company is not as successful as expected.
- The merger between the SPAC and the target company is not complete.
- The SPAC is being investigated by regulators.
- The SPAC has been subject to negative publicity.
SPACs can be risky investments, but they also offer the potential for high returns. If you’re considering investing in a SPAC, it’s important to do your research and understand the risks involved.