Glossary

SPAC

SPAC stands for “special purpose acquisition company” – a company listed on the stock exchange like a normal business, but with no business operations of its own.

SPAC stands for “special purpose acquisition company”. A SPAC is listed on the stock exchange like a normal business. However, a SPAC doesn’t have any business operations of its own. Instead, its sole purpose in listing is to raise money to buy an existing company. SPACs are thus also known as “blank cheque companies” in the US. In the UK, they’d more commonly be described as “cash shells”. 

Investors in the SPAC pay $10 per unit. That buys a share in the SPAC, plus other securities (“warrants” and “rights”) whose future value will depend mostly on the value of any deal the SPAC does. Once it has listed, the SPAC generally has two years to find a deal. If it doesn’t then it has to return the cash to shareholders. If it does find a deal, then investors can still back out – redeeming their shares for $10 plus interest and keeping the other securities.

For private companies, the benefit of joining the stockmarket by merging with a SPAC is that it is less stringent in regulatory terms than the traditional process of listing via an initial public offering (IPO). For investors – particularly small investors – buying into a SPAC theoretically offers a chance to invest in deals and companies that they would otherwise struggle to access.

What’s the downside? SPAC incentives are skewed towards the founders, who usually get 20% of the stock at a discount, or even free. An even bigger issue is dilution. An analysis of 47 SPAC deals done in the 18 months from January 2019 by Michael Klausner of Stanford Law School and Michael Ohlorogge of New York University School of Law found that, on average, SPACs lost 12% of their value within six months of a merger deal. This is mainly due to initial investors – usually hedge funds – redeeming their shares prior to the merger. So they get their money back plus interest, plus the warrants and rights. Those who remain invested bear the cost of this “free money”.

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