What are Special-Purpose Acquisition Companies (SPACs)?

Recently, Special-Purpose Acquisition Companies (SPACs) have been getting a lot of media attention. This is because SPACs are gaining popularity as a faster, cheaper way to get businesses listed on the stock market.

SPACs basically raise money by means of an Initial Public Offering (IPO) and then use the money they raised to acquire or merge with private companies. Once private companies are acquired by a SPAC, they become publicly traded. 

In September, for instance, Chamath Palihapitiya announced that his SPAC Social Capital Hedosophia II will acquire Opendoor, an online marketplace for buying and selling houses. Recent examples of SPAC IPOs also include DraftKings Inc., electric vehicle manufacturer Nikola Corporation and space travel company Virgin Galactic Holdings Inc.

What are SPACs, exactly?

“A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company” - Investopedia

In other words, SPACs serve the sole purpose of buying other companies (which usually happens within 2 years of raising funds). Once the acquisition takes place, the SPAC usually gets listed on one of the major stock exchanges. 

SPACs are also known as “blank-check companies” since SPAC  investors often have no idea what company they ultimately will be investing in. The money SPACs raise is put into an interest-bearing trust account and these funds cannot be used except to complete an acquisition or to return the money to investors if the SPAC is liquidated. 

2020: Year of the SPAC

Public listings via SPACs involve fewer legal hurdles than traditional IPOs and are often much faster. Additionally, private companies that get acquired by SPACs get access to guidance of an experienced partner.

Special-Purpose Acquisition Companies have already raised more than US$ 25 billion in 2020 so far. In July alone, notorious investor Bill Ackman raised US$4 billion in the largest Spac IPO on record. In the prospectus, the Ackman’s SPAC states that it is looking for ‘mature unicorns’, high-quality growth companies that have achieved significant scale while remaining private. 

Among companies planning to get listed via SPACs in the near future is Playboy. The lifestyle brand said it plans to get listed on the stock market by merging with Mountain Crest Acquisition. If this works out, Playboy will eventually  trade on the Nasdaq under the symbol PLBY*!

*All corporate names and logos are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

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