Special Purpose Acquisition Companies

IWC Wealth Notes - Nov 2021

What is a Special Purpose Acquisition Company (SPAC)?

· A shell company formed to raise capital through an IPO in order to acquire an existing (traditional) company.

· Generally, SPAC’s only assets are money raised through the IPO.

· Also known as a “blank check company”, as investors have no idea what company they will ultimately be investing in.

· Money raised in IPO are placed in a interest-bearing trust account, and the SPAC’s founders generally have 2 years to acquire a company. Funds in trust can only be dispersed for two reasons:

o Complete acquisition of a company

o Return to investors if they don’t complete an acquisition at the end of the 2 years.

How does SPAC investment benefit investors?

· Investors in a SPAC IPO have the option to redeem their shares for what they paid for them plus interest, should the company fail to find an acquisition target and finalize a deal. In addition, they also have a warrant, which may turn out to be worth a lot if the SPAC is a success.

· Investors who are involved in a SPAC from the outset could have an opportunity to own a bigger stake in the ultimate merged company than what they would be able to achieve in the traditional IPO route.

How does a SPAC compare with Initial Public Offerings (IPO)?

· They're cheap. Many SPACs are priced at $10 a share, and they often invest in hot areas. Recent SPACs focus on popular sectors in the tech or consumer fields. Thus, this increases the potential of achieving higher investment growth.

· SPACs can provide a quicker route for young, fast-growing companies to hit the market earlier as well as better price transparency.

· The SPAC approach offers several distinct advantages over a traditional IPO, such as providing companies access to capital, even when market volatility and other conditions limit liquidity. SPACs could also potentially lower transaction fees as well as expedite the timeline to become a public company.

Best way to invest in SPACs?

· An ETF is a great instrument for SPAC investing because you get diversified exposure through a broad portfolio of SPAC deals, reducing your investment risk. While these investments can be speculative, SPACs and SPAC ETFs offer increased access to private market deals for the average investor.

Do approach us if you are interested in this investment model.

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