You’ve probably heard me talking about SPACs a lot lately. And if you watch any trading or finance shows on TV, you’ve probably heard SPACs mentioned there, too. There’s a good reason for this: As of late, SPACs have become extremely popular, because many SPACs have done well! But what exactly is a SPAC? This blog post will explain.
First of all, the acronym “SPAC” stands for “special-purpose acquisition company.” In a nutshell, it’s just a company – a shell corporation, really – that’s set up solely to acquire another company, without disclosing in advance which company will be purchased. The benefit for setting up a SPAC is that it can be publicly traded, without having to go through the long, complicated process of a traditional initial public offering. Maybe you’ve also heard of a “blank check company” – that’s the same thing, just a different term.
In many ways, SPACs are sort of like reverse IPOs. They start off essentially as blind companies with no actual assets, except the money that they raise (usually around $10 per share). Next, they’ll go ahead and purchase a company. That’s it. Simple. And, like I said, it’s a much faster and simpler way to go public.
Over the last couple of years, many investors have been attracted to SPACs. Several SPACs have purchased companies that have turned significant profits, and in those cases, it’s been positive all around.
Another way of looking at it: Let’s say, hypothetically, that I was going to set up the small-scale, non-official equivalent version of a SPAC. I could start by asking 10 people to each give me $1,000 to purchase a company, but I wouldn’t tell them upfront which company I’m planning to purchase. If they believe in me and my track record, they’d each invest $1,000, and then I’d immediately have $10,000 to purchase the company that I had secretly set out to buy beforehand.
Then later, surprise! I bought ‘Company XYZ.’ And guess what, Company XYZ is crushing it right now in the world of widgets. And now we’re all making money, and that $1,000 investment has doubled for each of the 10 investors. Obviously, this kind of SPAC success doesn’t happen all the time in the real world, but especially in the last few years, for shell companies with good reputations, it happens often enough to have made SPACs a popular choice for investors.