For retail investors who are on the lookout for upcoming companies and exciting new startup ventures that they are looking to buy shares in, and assuming that you are willing to take on a high level of risk but are lacking a large surplus of funds, then a Special Purchase Acquisition Company (SPAC) may be what you need. A SPAC is a great tool with which investors can get some of the action in new fashionable sectors that have survived the pandemic and are now keen to make their mark on the world.
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What is a SPAC?
A SPAC, also known as a “blank cheque company” or shell corporation, is a publicly traded firm that exists solely to raise cash for the purpose of buying another company. They are created specifically to pool funds for the purpose of financing a merger or acquisition venture within a set timeframe.
As such, the SPAC has no specific business plan beyond attempting to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. Such companies have existed for decades but in recent years they have undergone a surge in popularity. In 2019, 59 were created, with $13 billion invested; in 2020, 247 were created and made investments totaling $80 billion.
Their recent and significant rise in popularity, I believe, is not just due to the popularity of dot-com disruptors and innovative new technologies but also an increase in entrepreneurial and “can-do” attitudes which has seen many exciting new businesses spring up.
The success of a SPAC very much relies on the reputation of the sponsors who have formed the SPAC in question. Experts in their respective fields will usually pool their knowhow and resources if they feel they have identified a lucrative opportunity. Such SPACs are very popular, which helps explain why the majority of SPAC mergers—a whopping 90%—are successfully completed.
Early Investors
The good news for early investors in a SPAC is that the majority have a low buy-in rate of only $10 a share. The intention is that once the company has been acquired, and the sponsors have taken it public on the stock market, these share prices will start to climb quickly and early investors can cash out their shares or remain invested for greater long-term profits.
Of course, the success of such investments, and prospects for long-term profits, depends on making the right pick. And it would be remiss of me not to warn that not all SPACs end with a successful merger, and of those that are successful, not all end up generating the lucrative returns on investment that attracted early investors.
As with any investment, there is no such thing as a sure shot, so it goes without saying that a SPAC does come with its own degree of risk, not least as it’s hard to predict the future but also because at the early stages the sponsors are still in the process of identifying an acquisition target. Typically, it can take two years for a SPAC to identify a target that they believe to be a worthwhile investment opportunity. On rare occasions, the SPAC will fail to identify a suitable target. In such instances, investors receive money from the trust account in proportion to their original investment.
Things to Consider
Anyone considering a SPAC would be wise to proceed with caution and, as with any investment, never invest more than they can afford to lose. That said, the list of recent successes is pretty impressive with the likes of Black Rifle Coffee, who completed their SPAC merger on February 9, 2022 and as of April 27 was already trading at $15.75 a share.
However, it must be said that, as you have no control over a SPAC, it is extremely important to do your due diligence prior to investing in one. And, as already mentioned, the best way of determining whether a SPAC is for you is to look at the management team behind it—and their respective track records. To quote Ben Franklin, “By failing to prepare, you are preparing to fail.”
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