A special purpose acquisition company “SPAC” is a publicly traded shell company that has been formed strictly for purposes of raising enough capital to purchase an existing company. Also referred to as a “blank-check company,” these development stage companies have no operations and purely rely on funding through an initial public offering “IPO”.
Anyone can invest in a blank-check company, ranging from private to public entities. However, they’re rather risky, and because of much uncertainty, the Securities and Exchange Commission define these companies as penny stocks and require them to offer more protections for their investors, to ensure their investments are allocated appropriately.
Lately, high profile individuals like former Goldman Sachs president Gary Cohen, have been investing their equity in blank-check companies, as they seem to be a booming trend in the stock market. Many companies have been turning to SPAC’s as an easier way to get listed on the New York Stock Exchange.
Just recently, Lordstown Motors made a statement that they plan to merge with a Special Purpose Acquisition Company and make themselves a public company. Companies are using these mergers as a gateway into Wall Street, instead of bearing through the time-consuming process of raising money from an IPO.
How Does a Special Purpose Acquisition Company Work?
The Special Purpose Acquisition Company creates an IPO, the company then has two years to acquire and merge into another business. Once a SPAC raises enough capital, the plan is to acquire the prospective company. As their Initial Public Offerings are bringing in the capital by storm in 2020, more private companies are willing to merge in what they call the best deal yet. While calculating the time it takes to do a traditional IPO, and the amount of money that goes into it, companies are weighing their cons and completing the merger to quickly get into the realm of publicly traded stocks.