What are SPAC stocks? What are the benefits and risks? How do they work? Special Purpose Acquisition Companies, or simply SPACs, are publicly traded companies created to purchase other companies. As the name suggests, it’s a special purpose vehicle for making acquisitions. What makes these companies so attractive to investors is their ability to grow through acquisition rapidly.
The main goal of a SPAC is to acquire a target company through an acquisition or merger. SPAC’s public listing goes through an initial public offering (IPO).
What are SPAC Stocks?
SPAC is an acronym for “Special Purpose Acquisition Company.” SPACs are new types of companies created to buy other companies with the help of an investment bank.
A SPAC is a blank slate that investors can use to acquire the assets they want the most. The idea behind creating a SPAC is to make it easier and more efficient for investors to buy out smaller businesses, thereby increasing market liquidity and valuations on these smaller players in the market.
There are two ways to benefit from investing in SPACs. The first way is by having the SPAC stocks rise as the price of the business increases after it’s acquired. The second way is through dividends passed down from the acquired business before they buy it out.
How do venture capitalists invest in SPACs?
With a disruptive and creative nature, the venture capital industry constantly searches for exits to provide long-term investors with liquidity. Due to the complexity of preparing a public IPO, VCs have started exploring other ways to take companies public and make the process easier and less time-consuming. SPACs have become more prevalent in recent years, opening doors for specific companies that might not have been considered for an IPO before.
This list includes companies with a less established business model, struggling to grow, troubled business history, or moonshot goals. IPO candidates typically have over $100 million and a defined business model with double-digit sales growth. On the other hand, SPAC companies only need to show potential to achieve these goals. The SPAC’s target companies can offer their forward-looking numbers.
This instance is not a privilege of both IPOs and direct listings. Having projections helps fast-growing companies tell their story while still being able to show profitability. SPAC companies are not cheap. The target company would need to pay 7% of what they raise to investment banks. To raise capital, a target company leaves its sponsors with 20% pre-merger equity. SPAC fees are typically a quarter of the money raised, and they generally are better disguised than IPO fees.
Supporting startups through SPAC companies is also beneficial for the VC ecosystem as it allows them to create exits for their portfolio. This ability enables VCs to remain invested for a longer time, turning some VCs into crossover investors. When a VC firm forms a SPAC, it becomes separate from an ever-growing venture capital field. VCs are typically deeply involved in the company’s strategic planning. They help guide the company through its IPO and provide ongoing management support.
Venture capitalists invest in SPAC companies with the hope of a better return.
How do SPACs work?
A SPAC usually goes public by raising capital through an initial public offering. Both its sponsors(founders) and outside investors typically raise funds. These two types of investors can usually purchase both ordinary shares and warrants. Such a setup will allow them to buy shares at favorable prices even when the target company’s identity is known.
SPAC companies typically search for a target after being listed. However, if they don’t find the target, they will unwind the vehicle and return the investors’ money. The time limit for this search is usually two years. During the course of the search, the money is safe in government bonds. Even so, the value can fluctuate depending on the management’s assessment of the acquisition target.
Once a target has been identified, the shareholders can vote on the acquisition once they receive the details. Once the SPAC has received approval from the regulators, the SPAC will then take on the target company name. This change will result in the company gaining a public listing.
Advantages of SPACs
SPACs are beneficial for firms that are planning on going public. That is because they can get a listing on the stock exchange in a matter of months, while the IPO process typically takes from six months to a year.
SPACs are getting increasingly popular because it takes them much less time to go public. Many companies opted to forego their IPOs due to the uncertainties caused by the global pandemic. In addition, the target company’s owners may be able to negotiate a higher price for their assets if they sell to a SPAC as SPACs have a limited amount of time to get the deal.
Lastly, a SPAC that prominent business executives sponsor can help a target company grow and enhance its management capabilities.
Disadvantages of SPACs
A SPAC IPO investor is leaping faith that the promoters will acquire or merge with a suitable target company in the future. But, unfortunately, the lack of regulation and the lack of disclosure from SPACs expose investors to the risk of being tricked into buying something that could be fraudulent or overhyped.
Returns from SPAC stocks may well be below expectations once the hype has worn off. In September 2021, Goldman Sachs noted that the median SPAC’s return was higher than the Russell 3000 index. Six months after a SPAC’s initial public offering, the median SPAC performance was significantly below the Russell 3000 index. As of September 15, 2021, around 70% of SPAC stocks that went public in 2021 were trading below their offer price of $10.
This poor performance could mean that the SPAC bubble is about to burst.
What makes SPAC stocks different than traditional investments?
How do SPAC stocks compare to ones going through a traditional IPO? The answer can vary depending on the company and its goals, timing, and the market and quality of investors.
A SPAC is a type of initial public offering that usually takes place before a private firm acquires a company. This procedure allows a highly-regarded executive team to raise capital from large institutional investors. Investors can think of it as a reversed IPO. While an IPO is a way for a company to raise money, a SPAC works the other way around. It is money looking to acquire a company.
A quick entrance to the market is one of the reasons why SPACs are so beneficial for companies. Aside from reducing the number of SEC comments and questions, going public via SPAC also allows a company to reduce the market entry time between two and four months. A SPAC can also benefit from having a long-term investor base that can support a company. Such assurance is not typical for an IPO. Unless it is painfully apparent that the company will do well.
While the traditional IPOs, direct listings, and SPACs are comparable, SPACs are a faster route to going public for young, fast-growing companies.
How technology companies can prepare for SPAC investment
The importance of due diligence and audits for IPO readiness and SPAC investment vehicle is crucial. However, due to the limited time available, SPACs must carefully balance speed with a thorough analysis.
Getting the right advice from an experienced and expert advisor is key to achieving the best results. Some areas where professional collaborators can be invaluable include the company’s equity story. A financial adviser can help present and package the target company in the most favorable light. They can also help negotiate the terms of the SPAC agreement with its sponsor.
Due diligence is a process that involves gathering and verifying non-financial and financial information. It can help a company avoid making mistakes and minimize risks. This strategy can help the company stand out from the rest. It can also help the investors identify the right opportunities and maintain their confidence in the company.
Structuring and documenting stress-tested financial projections is an essential part of a SPAC process. Doing so will help inform and justify an investment.
A team should anchor a projection to a set of data that explains the historical results and why it matters. They should also build it on well-documented assumptions and extend beyond at least three years in the future.
Thorough preparation of a business valuation involves analyzing tangible, intangible assets and assets integral to a company’s overall value.
Hot SPAC stocks on the market
Special Purpose Acquisition Companies (SPACs) have been making waves in the financial world because they help startups raise capital through mergers and acquisitions.
Some of the most famous SPAC stocks include DraftKings Inc., Opendoor Technologies Inc., Virgin Galactic Inc., ChargePoint Holdings, Inc., and Nikola Corporation.
DraftKings is a sports betting company based in Boston. Its market cap is about $20 billion. Earlier this year, electric vehicle infrastructure company ChargePoint Holdings, through its SPAC-linked initial public offering (IPO), raised close to $500M in net proceeds. Since then, the company has steadily grown and reached a market valuation of more than $10 billion.
Virgin Galactic’s stock market debut was one of the most anticipated SPAC IPOs of the past few months. The company is known for its space travel services. Last year, the company went public at a valuation of over $2 billion. The stock price has jumped by over 44% since then. Virgin Galactic is one of Reddit’s most popular SPAC stocks. As the clean energy industry explodes, more companies are going public. One example of this is Nikola Corporation, which debuted on the Nasdaq with a market value of over $12 billion.
Opendoor Technologies Inc., a California-based digital platform that enables users to transact and manage their residential real estate transactions, also gained much traction. The company has a market cap of around $10 billion and has a strong earnings record. During the first three months of 2021, it sold over 2,400 homes.
Pershing Square Tontine Holdings, Ltd. (NYSE:PSTH)
PSTH is a blank check company organized to acquire, merge, or combine a private company or asset acquisition. Its sponsor is the private investment firm of Pershing Square Capital Management. Bill Ackman, the CEO, is a veteran of the investment management industry who has spent almost three decades in the industry.
PSTH doesn’t focus on a specific target yet. Instead, it plans to pursue merger opportunities in the private and large-cap sectors. PSCM will work with PSTH to identify and analyze a target company’s business quality, competitive advantages, and sustainable competitive advantages.
PSTH will focus on companies in four key market segments: IPO candidates, private equity funds, family-owned businesses, and mature unicorns.
PSTH has a unique structure and is willing to acquire a minority stake in a company on attractive terms.
Pershing Square Capital Management, LP.
Pershing Square Capital Management, LLC is a registered investment advisor that provides services to individuals and institutions. PSCM is a value investor that focuses on high-quality, large-cap businesses with attractive growth potential and compelling value propositions.
PSCM often holds large minority stakes in fast-moving companies that have underperformed in the past. Through its partnership with boards of directors and management teams, PSCM has helped its portfolio companies create long-term value.
Virgin Galactic (NYSE: SPCE)
Virgin Galactic is an American spaceplane company founded by Richard Branson. This US-based company is developing suborbital spaceflights for commercial use. Virgin Galactic’s spacecraft launches from a carrier airplane known as the White Knight Two.
An initially scheduled date for Virgin Galactic’s first spaceflight was for 2010, but the date was delayed several times due to various factors. The company worked on the launch of LauncherOne before they spun it off to Virgin Orbit. According to the company’s founder, Richard Branson, the company is in the best position to provide rocket-powered air travel. On December 13, 2018, the project’s first suborbital flight took place. The flight, which lasted for about 30 seconds, reached an altitude of 82.7 kilometers.
In February 2019, the project launched a spacecraft with three people on board. They traveled to an altitude of 89.9 kilometers. On July 11, 2021, Virgin Galactic’s founder Richard Branson and his crew rode on a flight to the edge of space. If all goes according to schedule, the first paid passenger flights will launch in 2022 following the completion of the test flights.
In 2010, the Abu Dhabi sovereign wealth fund Aabar Investments purchased a controlling stake in Virgin Galactic. As a result, the company, which focuses on space tourism, received exclusive rights to operate in the United Arab Emirates. In 2011, Aabar invested another US$110 million to launch small satellites into orbit. Entering 2014, Virgin announced that they were in talks with Google for a potential funding injection.
The New Mexico government has spent more than $200m on a facility for commercial space travel. Virgin Galactic is the primary tenant.
Virgin Galactic received a listing on the New York Stock Exchange on October 28, 2019. The company became one of the popular SPAC stocks among retail investors after its IPO. It is now a common topic on the r/wallStreetbets subreddit.
Nikola (NASDAQ: NKLA)
Nikola Corporation is an American company striving to create zero-emission vehicles. They have presented various such vehicle concepts from 2016 to 2020. Furthermore, the company declared that it would take some of its ideas into production in the future. Nikola Tre went public on June 4, 2020.
Nikola Corporation got its name in honor of Nikola Tesla. Its name is similar to that of Tesla, Inc. However, they are not related. In September 2020, government officials investigated the company for alleged securities fraud. In July 2021, a US federal grand jury charged Trevor Milton, the former CEO of Nikola, with three counts of criminal fraud. However, the charges were not against the company.
In March 2020, Nikola announced merging with a special purpose acquisition company VectoIQ Acquisition Corporation (ticker VTIQ), organized by Steve Girsky. As a result of the merger, the combined company received a listing on the NASDAQ exchange under the NKLA ticker symbol.
Nikola’s stock started trading on June 4, 2020, after the two companies completed the merger. By June 9, its shares had more than doubled. In addition, Nikola has started taking reservations for the Badger pickup truck.
In August 2020, the company’s value was $13 billion, up from its revenue of $80,000 in the same period a year earlier. On September 8, 2020, Nikola and General Motors announced a partnership. Under the terms of the agreement, the latter would acquire an 11% stake in Nikola. Nikola also agreed to acquire a board member from General Motors. The company would get the right to use its facilities to produce the Nikola’s Badger electric vehicle in exchange.
Digital World Acquisition Corp. (DWAC)
On October 21, 2021, Donald Trump announced that a special purpose acquisition company he created would be taking its newly formed media company public. The name of this SPAC is Digital World Acquisition Corp.
Following the announcement, the shares of the newly formed SPAC have soared over 1,000% in just two days after the merger announcement.
Retail traders’ hype helped push the rally. In addition, on social media platforms like Reddit and Twitch, DWCA was one of the most mentioned SPAC stocks after the statement.
However, the bubble that formed around this SPAC has suddenly deflated as investors moved on from the hype. The value of Trump Media & Technology Group, which halted trading at $131.90 per share, has reached about $4.5 billion.
The company was valued at about $1.7 billion in the original deal. However, DWAC didn’t provide much in terms of financial statements or guidance.
Additionally, the firm plans to launch a website called Truth Social to compete with Big Tech. The intend is to have a limited launch in November 2021. Allegedly, the site will go full public in 2022.
The stock’s two-day rally is reminiscent of the frenzy that greeted GameStop’s surge in January 2021.
Company website: https://www.dwacspac.com/
Churchill Capital Corp IV (NYSE: CCIV)
Michael Klein is the founder of Churchill Capital Corp IV. He is also a founder and a managing partner of a company he founded in 2012 – M. Klein and Company. M. Klein and Company provides its clients with a variety of advice focused on their specific objectives.
In September 2018, the company launched Churchill Capital Corp., a SPAC that raised $690 million through its IPO. The listing is on the New York Stock Exchange, and the symbol is CCC. In May 2019, the company merged with Clarivate, a global leader providing actionable insights and analytical data to accelerate innovation.
Churchill Capital Corp II, a subsidiary of Churchill Capital Corp, launched in June 2019 and raised $690 million in its IPO. The company is actively looking for an initial business combination. Churchill Capital Corp III, their 3rd SPAC, completed its IPO in February 2020, gaining $1.1 billion. The New York Stock Exchange symbol is CCXX.U. In July 2020, Churchill Capital Corp III, through its wholly-owned subsidiary, entered into a definitive merger agreement with MultiPlan, a healthcare cost management company.
They are focused on identifying and completing initial business combinations with companies that complement their existing management team and expertise. Their track record provides a compelling opportunity for prospective targets looking for proven, expedited, and value-creating solutions.
Churchill Capital Corp IV will acquire the assets of California-based electric vehicle manufacturer Lucid Motors. The deal values the company at $35 billion. In addition, Lucid Motors is planning on joining other SPAC stocks on the New York Stock Exchange shortly. Their ticker will be LCID. Churchill Capital’s market capitalization is over $6 billion.
InterPrivate II Acquisition Corp. (NYSE: IPVA)
InterPrivate II is a special purpose acquisition firm that acquires businesses not confined to a specific geographic region or industry. They may initially focus on sectors related to the mobility and auto-tech industries, such as retail, e-commerce, and industrial technology.
They believe that their selection process will allow them to connect with the right partners and investors at the right time. InterPrivate II is a special purpose acquisition company looking to acquire private companies. Their office and a headquarter is in New York.
The CEO is Ahmed Fattouh. The company went public in 2021. However, on June 1, 2021, the New York Stock Exchange notified the company that it failed to file a report regarding its first three months of 2021.
Zanite Acquisition Corp. (NASDAQ: ZNTE)
Zanite is a private equity firm focused on the aviation, defense, and urban mobility sectors. With a strong track record of success, they will provide their clients with a wider variety of value-added opportunities unavailable to most participants within the marketplace.
Over two decades, their team has built a deep knowledge base and processes that allow them to identify, review, and transact transactions quickly and reliably. The knowledge and experience of their management team will enable them to source, develop, and consummate a transaction that fits their investment thesis.
The team at Zanite has decades of combined public company experience in aerospace and defense, technology, and urban mobility. Rigorously researched and clearly stated hypotheses enable management to identify and invest in industries it profoundly understands.
Zanite Acquisition Corp. is a special purpose acquisition company located in Ohio. The company was able to raise more than $230 million in its IPO in November 2020. The company CEO is Steven Rosen.
Zanite is reportedly in talks to acquire Eve Urban Air Mobility, which is working on an electric vertical take-off and landing vehicle. The company will expectedly raise around $2 billion in its IPO. The value of Zanite is over two billion dollars.
FTAC Olympus Acquisition Corp. (NASDAQ: FTOC)
FTAC Olympus Acquisition Corp. is a blank check company focusing on acquiring or merging with a technology or financial services firm. Betsy Z. Cohen, as Chairman of the Board, and Ryan M. Gilbert as President and Chief Executive Officer, are leading this company.
Olympus Capital Corp is a special purpose acquisition firm whose goal is to acquire a portfolio of companies. Moreover, it is ranked third on Reddit’s list of the best SPAC stocks to buy. The company’s target market is the technology sector, which includes financial technology. It raised over $754 million in its IPO in August 2020.
Olympus Acquisition Corp. has agreed to acquire Payoneer, a New York-based fintech company valued at over $3.3 billion. The company will list on the NASDAQ under the symbol PAYO.FTAC.
Social Capital Hedosophia Holdings Corp. VI (NYSE: IPOF)
Social Capital Hedosophia is a blank check company. Its goal is to acquire one or more businesses and assets via a capital stock exchange, stock purchase, merger, asset acquisition, and reorganization.
Hedosophia Holdings Corporation is a SPAC that invests in private companies. The company office is in California, and the CEO is Chamath Palihapitiya. Hedosophia went public in October 2020 and raised more than one billion dollars from the offering. In addition, Reddit places it second on the top 10 SPAC stocks to obtain.
Social Capital Hedosophia is in talks to acquire Equinox, a New York-based holding company with over $7 billion market value. Equinox, which mainly focuses on the fitness industry, is planning on going public soon. Some of its famous brands include Blink Fitness and SoulCycle.
Company website: https://www.socialcapitalhedosophiaholdings.com/
Conclusion: The Future of the SPAC Market & a Look at Some Key Trends
The SPAC market has shown steady growth, with the total number of funds managing approximately $2 trillion in assets. SPACs are becoming an integral part of the global capital markets. They provide investors an opportunity to profit from the growth of emerging companies while preserving their capital, which is often necessary for illiquid investments.
The future of SPACs is bright, with development opportunities. The focus will be on new instruments that offer investors more liquidity, better returns, and more transparency. Furthermore, SPAC Research stated that public offerings by special purpose companies in 2020 raised over $83 billion. By June 2021, the total amount raised by SPAC-facilitated initial public offerings has reached over $108 billion.
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This article was last updated on November 22nd, 2021.