Although SPACs (special purpose acquisition companies) are not new, they have increasingly been used as a way to turn private companies into publicly traded companies. In this article we will answer some of the most frequently asked questions about SPACs. You can learn about:
- What is SPAC?
- What you should consider before investing in SPAC.
- What Vanguard thinks about SPACs.
What is a SPAC?
A SPAC is a common alternative to the conventional initial public offering (IPO) technique. SPAC is a shell company that has no business activities.
You may be wondering why someone would create a company without actual business activities. The sole purpose of a SPAC is to raise money for the future acquisition of a target company. After an SPAC goes through an IPO, it puts the money raised into an interest-bearing trust account. This account will remain incomplete until the SPAC management team finds a private company for the public.
SPACs are also known as “blank check companies” because investors do not know that the goal will be achieved. In Vanguard, clients can start purchasing SPAC after the initial IPO, while SPAC units start trading in the secondary market.
How long does it take to find a target company?
A spec usually takes up to 2 years to find a target company.
If the SPAC management team fails to complete the merger with a private company, the trust account becomes liquidated and SPAC investors withdraw money from the trust account in proportion to their original investment. SPACs typically trade around $ 10 per unit.
What are the risks with SPAC?
There are many risks involved with investing in SPAC. These include:
- Not knowing the investment strategy of SPAC during the initial IPO.
- Having to rely on SPAC’s management team to find a suitable target company.
- Stay in the dark about the target company.
- Recent regulatory verification by the SEC.
- SPAC share price declines due to compensation from SPAC management team.
Companies that go the way of traditional theoretical IPOs are regulated and their audited financial statements are verified by the investors. Because of their structure, SPACs do not go through the typical IPO process and their success depends on the efficiency of the management team.
Investing in SPAC carries unique risks, so it is important to evaluate whether SPAC investment is the right choice for you. Before adding a SPAC to your investment portfolio, read the SPAC’s prospectus carefully and consider the company’s objectives and associated risks. The SEC has an investor education bulletin that discusses the risks associated with this investment.
How do SPACs trade?
In an SPAC IPO, the company will typically issue tradable units instead of ordinary shares:
1 SPAC unit = 1 share of SPAC common stock + 1 warrant (or a fraction of warrant)
Once an SPAC merger event is approved, the SPAC unit will automatically convert into common stock shares and acquired company warrants. It may take up to 2 days after the merger event to view your new shares and warrants online.
Tell us more about the warrant
Warrants give shareholders the right to purchase a certain number of shares of the company at a fixed price, known as the Exercise or Strike Price, until a certain date, known as the expiration date.
When a warrant redemption is issued, the SPAC Company may have limited time for the holder to execute their warrant before releasing all outstanding warrants for 0.01. More information on SPAC’s warrant redemption process can be found in its prospectus.
What is SPAC redemption right?
Prior to the merger event, SPAC shareholders are offered the opportunity to redeem their shares from the SPO’s trust account at the IPO price, which is usually $ 10 plus interest earned. This process is different from the unified vote.
If you are a SPAC shareholder and you wish to request a redemption, you must call our Resource Servicing Team at least 2 business days prior to the redemption deadline. The release deadline is stated in the SPAC Proxy Prospectus.
What does Vanguard think?
We believe it is best to avoid following investment trends and focus on the things that are within your control. Follow our 4 principles for successful investing:
- Create clear, appropriate investment goals.
- Develop an appropriate resource allocation using widely diversified funds.
- Reduce costs.
- Maintain vision and long-term discipline.
Can someone point you in the right direction?
Partner with an advisor to get a custom plan for you.
“SPACs: risk to remember”,