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SPACs offer the promise of high rewards with few risks

On Behalf of | Apr 9, 2023 | Business Transactions

Oklahoma residents who follow business news may know that special purpose acquisition companies have become far more common in recent years. A SPAC is created to raise money through an initial public offering that is used to buy an existing private company. Once the purchase has been completed, the acquired company merges with the SPAC. This makes the acquired company public and gives it access to new sources of capital.

Why use a SPAC?

SPACs are used to acquire companies because IPOs can raise a lot of money quickly. SPACs are also able to navigate the grueling IPO regulatory process much more quickly than traditional companies because they have no ongoing operations to scrutinize. SPACs are backed by respected entrepreneurs and investors, which means that they are not seen as being pump-and-dump schemes like reverse mergers often are. However, SPAC acquisitions have to be completed quickly, and the target company is often only given a few months to prepare for the regulatory rigors of becoming publicly traded.

Why invest in a SPAC?

When investors purchase shares in a SPAC, they do not know what the target company is as releasing this information could make the acquisition more difficult and raise questions about the SPAC. Instead, they make their decisions based on the financial resources and track records of the SPAC founders who are putting up 20% of the money. If investors get cold feet after the target company is identified, they can vote against the business transaction and redeem their shares. They also get their money back if the acquisition is not competed in the time allowed, which is usually between 18 and 24 months.

Low risks and potentially high rewards

Entrepreneurs like SPACs because they make it easier to raise money through an IPO, and investors like them because they take few risks and can earn high returns. However, SPAC acquisitions are only successful when strict time limits are met and rigorous regulations are adhered to, which means both the founders of the SPAC and the officers of the target company must be extremely capable.