News: What Are SPACs, and Why Are They So Popular Now?
SPACs have surged in popularity, but what has made them so red hot in the past two years?
Contributing Writer at Tally
November 30, 2021
Special purpose acquisition companies (SPACs) are decades old; however, in recent years, they’ve grown exponentially in popularity.
SPACs seemingly crop up daily, and the stock market is raving about them. But if they’ve been around so long, why have they become so popular over the past two years?
We tackle that question and much more about SPACs below.
What is a SPAC?
A SPAC sometimes referred to as a “blank-check company,” is essentially a shell company — a company with no operations or assets other than capital — formed through an initial public offering (IPO) that has one sole purpose: acquire private companies and take them public. SPACs are usually formed by investors or sponsors with expertise in certain businesses or industries.
The SPAC management team generally includes:
Officers and affiliates
This team chooses what companies the SPAC attempts to acquire.
When a SPAC forms, at least 85% of its IPO proceeds must go into an interest-bearing escrow account for future acquisitions. Typically, more than 85% goes into escrow, though.
Once the management team locks onto an acquisition target, the investors vote on the acquisition in a proxy. If the majority of the investors vote to approve the deal and less than 20% of investors vote to liquidate their shares, the deal is approved. If over half vote for the acquisition but over 20% also vote for liquidation, the escrow account is closed, and the funds are returned to shareholders on a pro rata basis, minus fees.
Funds are also returned to the shareholders if the SPAC fails to make an acquisition within a specific time frame, typically two years. Some of the more popular SPACs in the past few years include Rabbit LEAP Ltd., Frontier Acquisition Corp. and Jaws Spitfire Acquisition Corporation.
What are the benefits of SPACs?
Small private companies can always choose the IPO route to go public, but so many choose to go public via a SPAC. Why is that? There are a few key reasons.
First, they can bypass the arduous IPO process, which can take six months to over a year to complete. Going through a SPAC takes just a few months to complete.
Another benefit of a private company opting for the SPAC route is many small private companies use debt as financing. These leveraged companies may find it difficult to raise funds via an IPO.
Finally, the owners of the acquired company can often sell more of their shares after going public via a SPAC compared to an IPO. Plus, an IPO often requires them to hold onto their shares for a predetermined lock-up period.
What changed about SPACs, and why the sudden boom?
Today’s SPAC rules allow investors to redeem their shares in the company, whether they voted for or against an acquisition. Previous rules required investors to vote against acquisitions if they wanted to redeem their shares. This has led to a massive uptick in SPAC acquisitions being approved.
In turn, this has caused a surge in the popularity of SPACs, as 237 of these “blank-check companies” went public in 2020 and raised nearly $80 billion. In that year, SPACs raised more capital than they did in the preceding decade.
This boom was fueled by market uncertainties amid the COVID-19 pandemic, as companies looked to go public quickly before a crash occurred. SPACs afforded them that speed, while an IPO likely would have exposed them to too much risk.
Though SPACs are nothing new, their sudden surge is certainly intriguing. We’ll have to watch to see if their success continues or trails off as markets begin stabilizing post-pandemic.