A Special Purpose Acquisition Company (SPAC) is formed strictly to raise capital to acquire or merge with an existing private company and take them public through an IPO (Initial Public offering). SPACs have existed for decades in the financial world, but 2021 saw them soar and fizzle out later in the year. 613 SPAC IPOs were recorded in 2021 alone, with a combined value of $162 billion.
SPACs are also referred to as blank check companies since they have no commercial operations; it does nothing. They are usually created by a team of investors and Wall Street professionals; however, high-profile CEOs such as Richard Branson have taken up the trend and created their SPACs. SPACs do not have to disclose their target company at the beginning; the huge appetite for higher risk among investors has played a part in the popularity SPACs have gained.
How does a SPAC work?
The structure of the SPAC IPO consists of common shares and a warrant. A warrant is a contract allowing the holder to purchase additional shares at a fixed rate later. The funds raised in the IPO are placed in an interest-bearing trust and cannot be used for anything other than to acquire the target company.
Founder shares usually have the same voting rights as the publicly offered shares; however, unlike publicly offered shares, founder shares have the right to elect the SPAC’sSPAC’s directors. Warrant holders do not have voting rights.
The shareholders vote to approve the company they want to acquire. And once the acquisition is complete, investors can either exchange their shares for the merged company shares or redeem their SPACs shares for their initial investment in addition to the interest accrued. Usually, the sponsors get a 20% stake in the merged company.
SPAC’sSPAC’s founders have about two years to conclude an acquisition. If the two-year deadline is not met, the SPAC is liquidated, and the raised capital is returned to the investors with interest. It’sIt’s worth noting that in some cases, the interest earned in the trust is used as the working capital of the SPAC.
The sudden SPAC popularity
SPACs have existed for a long time and often have been used as the last resort for companies with trouble raising money from the public. The severe market volatility is one of the major reasons cited for the sudden popularity of the SPACs. The fear of most companies spoiling their public stock debut caused them to seek an alternative in the form of the SPACs.
The SPAC route takes a maximum of two years; however, a few months is enough to wrap it up; it’sit’s thus considered faster; since the typical IPO registration process could take up to six months. The SEC’sSEC’s regulations for SPACs have helped boost their reputation in finance, building investors’ confidence.
In a SPAC merger, the target company can negotiate its fixed valuation with the SPAC founders, especially due to the limited time the founders have for the acquisition. Since well-known investors sponsor the SPAC, the target company gets enhanced market visibility and management experience from the SPAC sponsors.
Comparing SPACs, IPOs, and direct listings
The three, SPACs, IPO, and direct listings, are the different approaches a private company can use to go public. What’sWhat’s the difference between the three, and what are companies looking for?
IPOs
Rigorous scrutiny by the SEC before the company can begin trading. The SEC requires that they file many financial documents; this gives the public enough before deciding whether to invest.
The company is a le to work with top Wall Street firms that can evaluate the company fairly to find the right buyers for the shares.
A post-IPO lock-up period in an IPO ensures the company’scompany’s executives do not unload their stock to the market.
An IPO is high-profile and expensive; the investment bank charges a fee while monitoring the IPO closely to ensure its success.
The company lists and sells new shares to the public.
SPACs
The process can end with either the acquisition of the target company or a merger with the SPAC.
A company going public through the SPAC route will likely do so faster and more easily because SPACs have fewer SEC hurdles to jump through.
SPACs have a limited time to find and acquire their target company; two years may be needed to liquidate the SPAC.
Fewer fees are required for SPACs, which makes them suitable for small companies.
Direct Listing
Using direct listing, the existing shares are sold to the public by listing them directly to exchanges such as the New York Stock Exchange.
A company going public by direct listing pays lower fees than IPOs and SPACs.
Companies with well-established market presence are best suited for direct listing since they do not require financial firms to support them.
Unlike through IPOs, Direct listing does not have a lock-up period where senior executives and employees are not supposed to trade their shares.
Relationship between Crypto companies and SPACs
SPAC IPOs are usually faster, simpler, and more cost-effective. Coinbase has undergone a lengthy IPO process for over six months, and many crypto investors have taken it as a lesson. With SPACs, there is reduced regulatory scrutiny on crypto companies; they are also less demanding and flexible, making SPACs more appealing. SPACs are thus the easiest route for private crypto companies to get listed on the major security exchanges. Cryptocurrency companies are relatively new, offering an appealing opportunity for SPAC investors.
Some crypto companies that have already gone public through SPACs, some of these companies include:
1. Diginex: Diginex merged with a SPAC called 8i Enterprises in 2020. It is now considered the first cryptocurrency exchange operator listed on Nasdaq.
2. Bakkt: Bakkt, the digital asset marketplace and wallet provider, merged with VPC impact Acquisition holdings to go public and start trading on the New York Stock Exchange.
3. Bitfurys Cifer Mining: the company merged with Good Works Acquisition Corp to go public. The merged company is listed on the Nasdaq stock exchange as of August 2021.
Final Thoughts
It’s clear this is just the beginning; more crypto companies will join to go public through SPACs. Some other crypto companies have already announced their plans to go public by merging with SPACs. The advantages SPACs have over IPOs will only see their popularity sour among crypto companies in the future.