The investment world is abuzz regarding the game changing opportunities for raising money via Regulation A+ paper. But crowdfunding and Reg.A aren’t the only options available to investors or businesses. It seems the SPAC has come back into play in a big way these days as we’ve been seeing several articles discussing the resurgence of activity in this area.
A special purpose acquisition company (SPAC) is a publicly-traded buyout company that raises money in order to pursue the acquisition of an existing company. SPACs raise blind pool money (mostly in the name of a trust) from the public for an unspecified merger, usually in a targeted industry. Each SPAC is typically sold at $6 per unit for one share of common stock (to be publicly-traded in the future) and two warrants that can purchase additional shares. If an acquisition is not made in two years, the money is returned to the original investors.
Just as we have coined the term “IPOtogo” for Regulation A+ deals, SPACs are somewhat of a “reverse-IPO”. The SPAC raises money to go public first, then looks for a private company to buy later. With a SPAC, a group of investors may buy a company in a target market (say cannabis real estate investing). The investors then go to an investment bank that has been raising funds from the public for the SPAC’s management team. The investment bank takes a fee (often around 10%), and the management goes out looking for companies over the next two years. If things go well, management buys a company with cash and/or shares, takes 20% of the profits that are (hopefully) generated, and the shareholders get ownership in a new company.
Special purpose acquisition companies have been extremely active recently, with three SPACs announcing deals in March, and another couple of deals looking to extend their acquisition deadlines. In the current environment, SPACs have been especially attractive to overseas companies as deal sponsors look to the U.S. to source capital.