101 on SPACs
Insight written by Angelee Ganno, originally published on April 8th, 2021.
SPAC stands for special purpose acquisition company. A SPAC is a shell company that makes an IPO with the intent to acquire other companies. Once that business is acquired, it operates as a publicly traded company. For example, electric truck company Nikola Motor was formerly a privately held company and then it merged with a publicly traded SPAC called VectoIQ Acquisition. Next, Nikola Motor underwent a reverse merger and is now publicly traded and separate from VectoIQ Acquisition.
So, are SPACs the new IPO? In short — no, but it may seem that way. The covid-19 pandemic led many companies that were eager to go public via traditional IPO to instead go public via SPAC in order to save time.
SPACs pose special risks for investors. It is important to know what companies the SPAC plans to acquire or what industry the SPAC would like to make acquisitions in. Investors should also look into the SPACs management team as they are responsible for managing acquisitions and use of the SPACs funds.
SPACs have become wildly popular as securities trading becomes more accessible, especially since companies in emerging industries tend to go public via SPAC as opposed to an IPO. Young retail investors are eagerly awaiting SPAC companies like the electric vehicle newcomer Lucid Motors to become publicly traded.
Investors should know THREE key things about SPACs:
1. A company going public through a SPAC does not release S-1 filings like an IPO. Because of this, it is difficult to gage the success of the target company and shareholders must rely on the proxy statement released by the SPAC detailing the target company’s financials, intellectual property, etc.
2. There are essentially two IPOs: the SPAC’s IPO and another when the acquired company is listed on the stock market under a new ticker following the reverse merger. If a prospective investor hears a rumor that The Pear Company is going to be acquired by a SPAC called Example Capital, they must understand that buying shares of Example Capital does not automatically equate to buying shares of The Pear Company. If the investor wants to be sure that they are investing directly in The Pear Company, they should wait until the reverse merger is complete and The Pear Company is publicly traded.
3. SPACs can go wrong even after the SPAC completes the target acquisition. SPACs are often promoted by or associated with celebrity investors. Be smart and do your own due diligence. In April 2020, Landcadia holdings, a SPAC, used its funds to acquire Waitr, a food delivery app. After the reverse merger it became clear that Lancadia inflated the valuation of the company and overstated the company’s technical infrastructure. Lawsuits by shareholders have ensued.
The covid-19 pandemic caused SPACs to become a popular way for privately held companies to go public in 2021. However, SPACs have been around for a while and will not replace the traditional IPO market. Investors should do their due diligence and remember not to treat SPAC investments like an IPO because of the additional risks.
Sources:
https://americanbar.org/groups/business_law/publications/blt/2020/07/spacs-litigation/
https://sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin
Angelee Ganno is a senior from Pelham, New Hampshire studying Political Science with minors in Business Administration and Justice Studies. Outside of the fund, she serves as the business manager for 91.3 FM WUNH and DJs two radio shows. Last winter, Angelee interned in the Lowell Juvenile Court where she learned about juvenile criminal and care and custody proceedings.
