Initial public offerings (IPO) are difficult. Unleashing stock to the people of the world, predicting the valuation and price investors will pay, whilst taking into account the myriad factors that swing share prices. It is a risky business, as pricing too high disincentives share purchases, and pricing too low reduces potential capital gained. A delicate balance that cannot be 100% accurately forecasted. However, SPAC provides an attractive alternative, which has attracted the attention of small and large businesses alike, looking to go public. SPAC (special-purpose acquisition companies) is a fake shell company for raising capital through an IPO, with the purpose of acquiring an existing company. Being described as a “shell company”, means it holds no assets nor conducts operations. Its value is derived from the potential merger with the public company, therefore the IPO is valued upon that.
What Purpose Do SPAC Deals Serve?
SPAC has a singular purpose, which is generating an IPO, and then merging with a business to go public. The SPAC has a two-year life span, which would dissolve once exceeding the time period. Although the surge in attention, it has actually been around for decades. Haran Seagram, a finance professor at New York Stern School of Business, said ”SPACs have been in existence since the 1980s, and that time it was associated with more fraudulent practices”. Thus far into 2021, SPACs have raised $99.9 billion in SPAC IPOs, which is higher than the years 2003 to 2019 combined. Also, in 2020 SPACs accounted for over 50% of public companies’ IPOs in the States. During the pandemic, extreme market volatility has reduced IPOs and increased SPAC. Space company Rocket Lab is just one of the recent companies that recently gone public via merging with a SPAC.
Why Is It An Appealing Option For Companies Looking To Go Public?
SPAC is appetizing for companies looking to go public. It can shorten the process to go public compared to traditional IPOs, alleviating associated risks, by gaining capital from public-equity investors. Going public via traditional IPO is a risky business, with volatile prices changing even the hours prior to shares trading. Predicting the share price that people will trade on the market is difficult to gauge as well. Some are claiming that the shortened time frame for private firms to become public is a backdoor route, jumping regulatory hurdles. Seagram said “If you have a standard IPO process, it takes anywhere between eight to 10 months to go public, but with SPAC you can go public faster. So you get around the regulatory framework, that is why I call it an arbitrage on regulation”.
Going public via SPAC is also appealing as it allows private firms to talk up their business. The valuation is determined behind closed curtains prior to the deal being announced. However, SEC (U.S Securities and Exchange Commission) warned: “sponsors may have conflicts of interest so their economic interests in the SPAC may differ from shareholders. Investors should carefully consider these risks”.
The prices of the stock change in three stages, after the SPAC IPO, after its merger has been announced (swings based on how investors perceive the deal), and after the merger has been completed (based on new merger company outlook). Electric vehicle startup, Canoo Inc, utilized a SPAC merger to go public, which pushed the shares from $10.20 to $22. After the dust settled, its share price dropped to $9.70 each, decreasing in value drastically compared to a few months prior. Harris Arch from Dupont Capital said, “There’s certainly a healthy debate of skepticism on whether SPACs can achieve those projections that a lot of times are very optimistic, especially for companies that don’t have revenue”.
Will SPAC Gain More Traction Or Is It Just A Craze?
It is uncertain whether SPAC will continue to be prevalent and gain more traction into the future, or if it is a current craze. Ruth Saldanha said “SPAC sponsors still have an incentive to raise more SPACs while the market is receptive and hungry for growth given the clear economic benefits to these sponsors. However, given the pure number of SPACs in the market, we believe new SPAC IPO issuance will likely cool off over the next few months, as sponsors turn to completing deals with their active SPACs rather than raising new pools of capital until more clarity is available”.
SPAC is just one of the recent developments of the financial sector, as the field faces drastic reconstruction. Efficiency is highly valued in our current world, which is a reason why SPAC is attracting more attention. It may overturn traditional practices to become the formal method of going public.
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