The term SPAC has been floating around quite a bit recently. The fundraising method has become very popular as an alternative to traditional IPOs and, in 2021, was used to raise more than $45 billion in less than two months. But what exactly is a SPAC? Read on to find out.
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What is SPAC stock?
SPAC is an acronym which stands for “Special Purpose Acquisition Company.” As the name suggests, it is a company created solely for the purpose of acquiring another company, or companies, which is why it is sometimes called a “blank check” company. So how does a SPAC work?
The original SPAC process, created in the 1980s, was quite simple: a company is founded by someone with suitable ties to potential investors, it goes public via an IPO, and all of the funds raised are placed in an interest-yielding account. Over a predetermined period of time, usually two years, the SPAC can make various investments and acquisitions, after which, in case no significant acquisition was made, it may close and return investors their money with interest.
However, the current hype surrounding SPAC stems from a specific use case that has to do with startup companies.
Cutting the IPO line
The natural course of a company begins with various stages of the “startup” process, which involve fundraising. At the end of the process, more often than not, successful privately owned companies eventually do one of two things: go public via an IPO or get acquired.
A SPAC process is, in a certain way, a mixture of the two: instead of the startup going public on its own, an SPAC is created specifically for the purpose of acquiring the startup after holding its IPO. After the SPAC’s IPO, a merger occurs which instantly makes the startup company public. This specific process has become quite popular recently, due to a number of reasons:
- Shorter time to market: As opposed to the startup, which would have had to go through various processes with the regulator, which may take more than six months, the SPAC is a completely new entity, therefore, cutting much of the red tape and going public more quickly.
- High volatility: The Covid-19 pandemic has generated extreme volatility in the markets, causing many companies to postpone their IPOs. Using a SPAC, these companies can go public more quickly and also have an additional, transitional phase before having their shares made publicly available.
- Low interest rates: Central bank interest rates are at an all-time low in many places around the world. This has caused investors to look for alternatives, and investing in a SPAC has become a popular option.
- Employee options: Part of the SPAC process enables company employees to sell their stock options without a lockdown period.
The 2021 SPAC frenzy
According to SPACInsider, as of mid-February 2021, there were already 160 SPAC IPOs, raising more than $48 billion in total. That is more than half of the entire amount raised in 2020 and around the same as the amount of money raised between 2009–2019 — all in less than two months.
One of the more notable SPACs during the past year was Social Capital Hedosophia Holdings Corp, currently valued at more than $10 billion, which was created for the purpose of taking the high-profile commercial space travel company Virgin Galactic public. Another example is Churchill Capital IV, which will reportedly merge with electric carmaker Lucid Motors and take it public.
Investing in SPAC stocks
To give its investors exposure to this extremely popular investment vehicle, eToro is launching 21 SPAC stocks on its platform. These include both of the above-mentioned companies, alongside many other SPACs that have either invested, merged, or will merge with some exciting, high-profile startup companies.
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