This year will be remembered as a watershed for a number of reasons. While the pandemic and presidential election obviously captured the lion’s share of the headlines, 2020 will be notable in the history books for another reason: It was the year that SPACs went mainstream.
SPACs, or “special-purpose acquisition companies,” have gained an extraordinary amount of popularity over the past year or two. SPACs themselves are really nothing more than shell entities — they’re essentially empty husks, designed to attract investors and capital, which they then use to target a company or companies for acquisition, similar to a reverse-merger. But they’ve become a popular way of taking a private company public while circumventing the traditional IPO process.
Though SPACs have been around for decades now, they’re only now really starting to generate headlines. And given the increasing interest in SPAC transactions, it can be vital for CFOs and other executives to know what’s fueling their popularity. But like almost everything, SPAC transactions have their pros and cons — which means executives should have a deeper understanding of SPACs in order to understand this apparent next stage of the market’s evolution.
It’s clear that Wall Street and venture capitalists have taken a serious liking to SPACs. As of early December, 200 or so SPAC transactions have taken companies public during 2020, raising $64 billion — roughly equal to the 194 companies that went public via the traditional IPO process, raising $67 billion.
And again, it’s hard to overstate just how infatuated investors seem to be with SPACs. During 2020 alone, and despite a rather turbulent year, SPACs have raised as much, if not more money than they have over the previous 10 years combined.
For SPAC founders and targets, going public via a SPAC transaction can be very appealing — especially if the SPAC target (the company a SPAC is seeking to take public) is particularly noteworthy or is generating a lot of press. The most obvious is that individual investors can invest in SPACs, and generally at a low price. Typically, SPAC shares sell for around $10, a price point at which almost any investor can tolerate. And tapping into that pool of investors can be especially attractive for SPAC.
There are other benefits to going public through a SPAC transaction, too, including a smoother, less-intensive process (compared to filing an S-1 with the SEC, as is the traditional route to an IPO), and a degree of protection for targets from market volatility.
But though there are advantages to taking a company public through a SPAC transaction, it doesn’t mean that the process is a cakewalk — in fact, there are many potential pitfalls and hurdles to overcome for those overseeing the transaction.
There are a number of things to consider when contemplating a SPAC transaction, both for targets and for investors. But for targets, specifically — which have likely already given considerable thought to going public, and the routes available to do so — a SPAC transaction can appear deceptively simple.
Again, time is just one of many considerations SPACs and targets need to keep in mind or prepare for when attempting a transaction that will take a target public. And given the current interest level in SPACs, it’s critical that executives understand the advantages and potential pitfalls of SPAC transactions.
SPACs may be a popular topic in the boardroom and at happy hour, and the last thing an executive wants is a blind spot when it comes to the potential downfall of a SPAC transaction.
Written by Dan Jones. This article was originally published by Strategic CFO 360.