Buyers Guide - Luggage Guru

by Daniel | Last Updated Jan 5th, 2022 We may earn a commission for purchases using our links, at no cost to you. So today I am going to talk about what a SPAC is, and why it’s suddenly become so popular. https://www.youtube.com/watch?v=yHOlww85lvE So, What is a SPAC?SPAC stands for ‘special purpose acquisitions company’ and it is a type of blank check company.which is very similar to a shell company.It is usually set up by a group of institutional investors that could be from a Hedge Fund or Wall Street professionals who will aim to raise money with an IPO and then eventually use the funds to acquire another company.According to the SEC, a SPAC has no Commercial operations as it makes no products and doesn’t sell anything.Most commonly the only asset in a SPAC is the money that was raised via its own IPO When investors buy into an IPO of a SPAC they usually don’t know what the final acquisition company will be.This is also why they are sometimes called a Blank Check Company. So once the IPO is complete and has raised its targeted capital, the money will then go into an interest-earning trust account and will stay there until either the Management or founders of the SPAC find an appropriate company that is looking to go public through an acquisition. The Sponsors of the SPAC then have a set deadline to find find a suitable deal which is usually within 2 years after the initial IPO.If the sponsors fail to find an appropriate acquisition the SPAC will then be liquidated and the investors will get their money back with any interest that has been accrued.If the SPAC sponsors do eventually complete an acquisition the investors in the SPAC can then choose to either swap their shares for shares in the newly merged company or they can choose to redeem their SPAC shares and get back their original investment plus any accrued interest that was made whilst the invested money was in the trust. Once the Sponsors of the SPAC have completed the Merger with the new company it is not uncommon that they will get a 20% ownership in the outstanding shares once the IPO is completed. So why have SPACs suddenly become so popular in the last year?Seeing as they have been around for decades and were usually used as a last resort for companies that were looking to raise money. One reason is because of the Pandemic, as it has caused extreme market volatility over the past year.Because of the increased volatility in the markets, some companies decided to postpone their IPO’s in fear that the uncertainty of the market may affect their stock's initial public offering. But there were other companies that decided to avoid a conventional IPO and instead, they merged with a SPAC.By choosing this route the company is able to go public and receive capital a lot quicker than a conventional IPO.Generally speaking, a SPAC acquisition can be closed within a few months whereas registering an IPO with the SEC can take up to 6 months. Another benefit of a SPAC is that the target company is able to negotiate a fixed valuation with the sponsors of the SPAC. So are SPACs worth investing in?Well, there are risks with SPACsIt is possible that potential company acquisitions are rejected by the SPAC shareholders.Also as an investor in a SPAC, initially you don’t actually know what you are investing in.It is possible that the SPAC does find a good business to acquire and you do actually make a reasonable return on your initial investment.It is also possible that the SPAC doesn’t acquire a good business, and in this case, you may lose money on your initial investment.Former Goldman Sachs CEO Lloyd Blankfein expressed some concern earlier this year whilst talking in CNBC's Squawk Box by saying - “You’re getting companies public, but you’re getting the public in a two-step process where one of the elements of an IPO is dropping out,” “When the initial SPAC goes public, you are scrutinizing a shell company, possibly the reputation of the sponsor,” “When that company then de-SPACs and mergers, it’s a merger, it’s not an IPO that carries with it a lot of diligence obligations.” “In the absence of diligence, that’s going to be what will happen,” “There are going to be things that go wrong.” “some people make a lot of money and investors lose money,”