Special Purpose Acquisition Companies (SPAC)

Subject: Economy

Context: Many countries are today seeing SPAC as an alternative to Initial Public Offerings (IPOs)

Concept:

SPACs offer a new route for high-risk taking individuals to participate in the start-up euphoria.
It is an empty corporate shell (or blank-cheque companies with no operations or business plans when seeking investment) that raises money from investors with the aim of acquiring private businesses by merging them.
It takes companies or start-ups public through the back door route. In this they compete directly with private equity investors and strategic buyers for acquisition candidates
Its significance lies in letting clients know about a piece of highly fancied emerging businesses that can quickly soar in value.
Issue in process of IPOs which needs preparing for more disclosures, hiring investment bankers, getting the pricing right and then hoping investors will bite needs 18-24 months. SPAC reduce this time and risks. It can complete its offer in a matter of months and once done, the target company can simply merge with it.
The people who sponsor SPACs are responsible for raising money and negotiating with target companies. For this service, the fee to the sponsor can be quite stiff.