WHAT ARE SPACs
A SPAC is a Special Purpose Acquisition Company whose business plan is to raise capital in an initial public offering (“IPO”) and, within a specific timeframe, engage in a merger or acquisition with one or more unidentified companies.
Among other things, a SPAC must keep 90% of the gross proceeds of its IPO in an escrow account until the date of a business combination. The SPAC must complete one or more business combinations, having an aggregate fair market value of at least 80% of the value of the escrow account within 36 months of the effectiveness of the IPO registration statement.
Additionally, public shareholders who object to a business combination have the right to convert their common stock into a pro-rata share of the funds held in escrow.
Following a business combination, the combined company must meet the Exchange’s requirements for the initial listing of an operating company.
BLANK CHECK COMPANY
A SPAC is a shell company and also known as a “blank check” company, as listed its S1 registration with the SEC.
Unlike a traditional IPO, SPACs don’t sell any products or services.
Investing in a SPAC is investing in a management team that promises to acquire (purchase) another company within a set amount of time. You’re giving the SPAC team a “blank check”.
The acquisition typically takes place within two years but is allowed to take up to three per SEC rules.
SPACs Gaining Popularity
SPAC stocks are on fire right now. Nikola Corporation (NASDAQ: NKLA), DraftKings Inc. (NASDAQ: DKNG), and Virgin Galactic Holdings Inc. (NYSE: SPCE) all merged with SPACs this past year.
Prominent money manager Bill Ackman, who is on record for making the most profitable short trade of all time, just registered his own SPAC, Pershing Square Tontine Holdings, Ltd.
Before a SPAC announces a merger, it usually trades near its IPO unit price as listed in the S1 filing. It’s often $10.00 per share, but not always. The SPAC is in its “Searching” phase, as it searches for a company to acquire.
Once the SPAC announces a merger, the stock price may become volatile. Depending on how investors view the acquisition target, the SPAC stock price may spike, even before the merger is completed. Tortoise Acquisition Corp. (NYSE: SHLL) hasn’t finished its merger but is up more than 260% since announcing. Its closing price yesterday (July 10, 2020) was $26.89. Its pre-announcement closing price was $10.22. They expect to complete their merger sometime this quarter.
SPAC stocks and mergers are all the rage right now. If you do decide to invest in SPACs before their announced merger, remember that you’re investing in a shell company. Be sure to do your research on the management team.
So what do you think about SPACs? Let me know in the comments section.
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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