Guide to Special Purpose Acquisition Company (SPAC)

In this article, we tell you more about SPACs and how they work, and what you can expect from negotiations with SPACs.

A SPAC, or a special purpose acquisition company, has only these purposes: to either raise capital through an IPO or to acquire or merge with another company. SPACs do not have commercial operations, which is why SPACs are also known as “blank check companies” since their sole purpose is to gather funds. In this article, we tell you more about SPACs and how they work, and what you can expect from negotiations with SPACs.

Special Purpose Acquisition Company and IPO

A special purpose acquisition company (SPAC), commonly referred to as a “blank check company,” is a front company registered on a stock market with the intention of buying a private firm and bringing it public without using the standard IPO route. A public offering in which shares of a firm are offered to institutional investors and typically also to retail investors is known as an initial public offering (IPO) or stock launch. One or more investment banks generally underwrite an IPO and coordinate the shares’ listing on one or more stock markets.

Understanding special purpose acquisition company (SPAC)

SPACs are a special kind of corporation that is created with the express purpose of purchasing a target firm that does not already operate as a business. With the help of this idea, a “shell company” can obtain money through an IPO even though it has no active business operations. The SPAC combines with or buys a target firm after going public.

How does a special-purpose acquisition company work?

In order to pursue projects in a particular industry or business sector, SPACs are typically founded by investors or sponsors with that experience. The founders of a SPAC may have at least one acquisition target in mind. Still, they may want to remain anonymous in order to avoid making lengthy disclosures throughout the IPO process. Investors in initial public offerings (IPOs) sometimes know nothing about the firm they will ultimately invest in.

SPACs look for institutional investors and underwriters before releasing their shares to the general public. The money that SPACs raise through an IPO is deposited in a trust account that pays interest. These funds may only be used to complete acquisitions or, in the event that the SPAC is liquidated, to repay investors. Typically, a SPAC has two years to execute a transaction before it must liquidate. In some circumstances, a portion of the trust’s interest income may be used by the SPAC as operating capital. A SPAC is typically listed on one of the main stock markets following an acquisition.

Characteristics of a Special Purpose Acquisition Company:

Before you consider forming a special purpose acquisition company, below are some characteristics that most SPACs commonly have:

Characteristics of a Special Purpose Acquisition Company

  • Trading mechanism – Regardless of the kind of market, trading mechanisms relate to the procedures involved in trading assets and securities. Exchanges, dealers, or OTC marketplaces may be among these markets. The procedures that match buyers and sellers of an item are referred to as mechanisms.
  • Stockholders’ governance – Corporate governance is the collection of laws, procedures, and regulations that govern how corporations are run. The phrase refers to both internal and external elements that influence the objectives of the many parties with an interest in a firm, such as shareholders, clients, suppliers, government regulators, and management.
  • Experienced management – Experience management is a method for monitoring, measuring, analyzing, and improving all customer interactions with the business. These individuals may include staff members, clients, suppliers, and other stakeholders. Experience refers to a person’s view of a firm and any associated emotions they may have as a result of their interactions with it. Experience is quantified through analytics tools and surveys in both quantitative and qualitative ways.
  • Banking management – The process of overseeing the bank’s statutory operation is referred to as bank management. The special objects of management that are associated with banking operations and other interactions that are also associated with the execution of management tasks in banking are the special objects of management that characterize bank management.

Rules and regulations for SPACs

SPACs must have a $250,000,000 total market value, a $200,000,000 market value of shares held by the public, and a closing price or initial public offering price per share of at least $4 at the time of initial listing. SPACs are typically required to adhere to all corporate governance standards. A SPAC will follow the standard IPO procedure, which includes submitting a registration statement to the U.S. Securities and Exchange Commission (“SEC”), responding to SEC comments, doing a road show, and then underwriting with a firm commitment. Until released to finance the business. The IPO proceeds will be kept in a trust account.

The pros and cons of the particular purpose acquisition company

There are certain advantages and disadvantages in forming a special purpose acquisition company:

Pros of a SPAC

  • Initial price determination – The price of your SPAC is negotiated with you before the transaction closes, which is significantly more favorable in a turbulent market than the price of your IPO, which is dependent on market conditions at the time of listing.
  • Possibility of generating further funds – SPAC sponsors will raise debt or PIPE (private investment in public equity) money in addition to their initial capital to finance the transaction as well as to support the merged company’s growth. The goal of this backup debt and equity is to guarantee that the deal will go through even if any SPAC investors decide to sell their shares.
  • No need for roadshow – A SPAC merger does not require a significant roadshow to attract investors to public markets.
  • Operational competence is available – SPAC sponsors are frequently seasoned financial and business experts. They can use their network of connections to give their management experience, or they can join the board themselves.

Cons of a SPAC

  • SPAC sponsors typically maintain a 20% ownership interest in the SPAC. SPAC also sponsors profit from an earnout component, which entitles them to more shares when the stock price hits a particular objective over a predetermined period of time, potentially resulting in further dilution.
  • Initial SPAC investors may redeem their shares, resulting in a capital shortage. If redemptions come in higher than anticipated, cash availability becomes questionable, forcing SPACs to pursue PIPE financing to make up the difference.
  • The target firm typically bears the majority of the burden of preparing for the necessary financials in the SEC filings, even if the SPAC sponsor may give assistance during the merger process.

Risk factors around special-purpose acquisition companies

The use of Special Purpose Acquisition Company (SPAC) transactions as a substitute for initial public offerings to acquire cash (IPO). SPAC transactions cause the involved private operating business (Target) to go public. The target must spend a lot of time and money on technical accounting and reporting issues as well as other De-SPAC concerns as a result of SPAC transactions.

Choose Eqvista for your high-quality business valuation report!

Most companies that get acquired or are looking to acquire usually go through a business valuation to get the best value for their money. It’s important to know the value of your business in order to have smooth negotiations, as the valuation can serve as the middle ground between buyer and seller. Need a business valuation? Contact Eqvista today and we’ll help you get started!

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