{"id":921324,"date":"2021-05-25T20:30:19","date_gmt":"2021-05-26T00:30:19","guid":{"rendered":"https:\/\/www.finder.com\/ca\/?p=921324"},"modified":"2026-03-09T18:28:21","modified_gmt":"2026-03-09T22:28:21","slug":"spacs","status":"publish","type":"post","link":"https:\/\/www.finder.com\/ca\/stock-trading\/spacs","title":{"rendered":"What is a SPAC?"},"content":{"rendered":"

Special purpose acquisition companies \u2013 or SPACs \u2013 have been around since the 1980s, but regulatory and market trends of recent years have caused an uptick in their popularity. This investment vehicle constitutes a unique opportunity for retail investors, but isn\u2019t without its drawbacks. Here\u2019s what investors should know before they buy in.<\/p>

What is a special purpose acquisition company (SPAC)?<\/h3>

A special purpose acquisition company is a publicly traded company formed with the exclusive intent to purchase another company. SPAC acquisitions serve a distinct purpose: they aren\u2019t interested in taking over daily operations or assuming an executive role. Instead, SPACs acquire privately held companies for the sole purpose of taking them public.<\/p>

SPACs are also called shell or blank check companies, as investors who back SPACs don\u2019t often know how the sponsors will allocate funds or what company will be acquired. Most SPACs trade at USD $10 per share, with the general assumption that once the target company is acquired and goes public, share prices will rise.<\/p>

How do SPACs work?<\/h3>

SPACs operate differently than traditional IPOs. Here\u2019s a breakdown of the process.<\/p>

1. The SPAC is formed<\/h4>

A group of investors begin the regulatory process of forming the special purpose acquisition company. These are the company\u2019s sponsors. The SPAC must undergo an IPO process with the U.S. Securities and Exchange Commission (SEC) before it can be listed on a US exchange \u2014 just like any other publicly traded company.<\/p>

2. The SPAC goes to market<\/h4>

Once the SPAC has completed its IPO process, it becomes available for purchase on public stock exchanges under its own ticker symbol. It\u2019s at this time that public investors can start buying in. Investor proceeds from the IPO are held in a trust or escrow account.<\/p>

3. The SPAC seeks a target company<\/h4>

The SPAC begins to search for a company to merge with. This is the company the SPAC will acquire and bring to market. A target company must be acquired within a certain time frame \u2014 typically 2 years \u2014 or the SPAC will be liquidated and funds returned to investors.<\/p>

4. The SPAC merges with its target company<\/h4>

Once a target company is named, the acquisition process begins. When the merger is complete, the combined company typically takes the name of the target business and its ticker symbol is updated accordingly. Investors can choose to stay invested and hold onto their shares or sell them \u2014 ideally at a profit.<\/p>

How to invest in SPACs<\/h3>

Public investors can invest in SPACs, but the process is a little different than the traditional buying and selling process:<\/p>

  1. Research sponsors.<\/strong> Once you\u2019ve found a SPAC that catches your eye, start investigating the track record of its sponsors. Do they have a prior SPAC experience? Have they taken part in profitable investments in the past? When you invest in a SPAC, you essentially invest in the market savvy of its sponsors. Do your homework and make sure the people who formed the SPAC know what they\u2019re doing.<\/li>
  2. Open a brokerage account.<\/strong> You\u2019ll need a brokerage account to invest in a SPAC. If you don\u2019t have one, explore your brokerage account options<\/a> by features and fees to find the platform that best meets your investment needs.<\/li>
  3. Search for the ticker symbol.<\/strong> Log into your brokerage account and use your platform\u2019s search tool or stock screener to locate the SPAC\u2019s ticker symbol. If you don\u2019t know the ticker symbol, you can often search by company name.<\/li>
  4. Submit your order.<\/strong> Once you\u2019ve found the SPAC\u2019s ticker symbol, enter the number of shares you\u2019d like to purchase and indicate whether you\u2019d like to make a market or limit order.<\/li>
  5. Wait.<\/strong> Once you\u2019ve invested in the SPAC, you\u2019ll need to wait for it to declare a target company to acquire.<\/li>
  6. Stay invested or sell.<\/strong> Once the merger with the target company is complete, you can elect to hold onto your existing shares or sell them.<\/li><\/ol>

    Why do companies use SPACs?<\/h4>

    Companies use SPACs because they\u2019re typically easier, quicker and less expensive than going the traditional IPO route. For private companies interested in going public \u2014 especially smaller companies \u2014 merging with a SPAC can bring them to the market in less time and with less paperwork.<\/p>

    A SPAC merger can be lucrative, too. The acquisition process has the potential to add up to 20% to the company\u2019s sale price than a typical private equity deal.<\/p>

    SPACs vs. traditional IPOs<\/h4>

    SPACs and IPOs are often mentioned in tandem, but they\u2019re not the same thing. And while SPACs do file for IPOs during the acquisition and merger process, a SPAC\u2019s IPO isn\u2019t the same as the traditional IPO used by most companies that enter the market.<\/p>

    Traditional IPOs are undertaken by private companies preparing to go public. They require extensive paperwork with the SEC \u2014 not to mention the process of drumming up investor interest and negotiating with institutional investors. It can be a frustrating and time-consuming process, and not all companies that undertake the IPO process actually go public.<\/p>

    SPACs also file for an IPO, but the process tends to be simpler. Since the SPAC\u2019s purpose is so singular and straightforward, there are rarely any hiccups with the SEC. Additional paperwork and negotiation is required during the acquisition process, but a merger is still easier and quicker for most private companies than filing for a traditional IPO.<\/p><\/div><\/article>

    Are SPACs safe to invest in?<\/h3>

    SPACs are safer than they once were \u2014 but they\u2019re far from foolproof. In the 1980s, when SPACs first came into fashion, they developed a poor reputation for trading illiquid penny stocks and making insider deals that devalued investor funds \u2014 essentially: pump and dump schemes.<\/p>

    But the SEC has revamped the regulations that govern this investment vehicle, leading to an uptick in SPACs as investors seek opportunities to get in on the ground floor of freshly public stocks. SPACs are safer than they were 30 years ago, but still have their risks. Namely: that they constitute a blind, illiquid investment. Investor funds are safely held in trust or escrow, but investors won\u2019t know what they\u2019re buying into until the SPAC declares a target company.<\/p>

    This leads us to a secondary risk to consider: the company acquired by the SPAC may not be one you\u2019d like to back. SPACs tend to target newer companies with growth potential. Continuing to hold the stock in the acquired company may expose your portfolio to unforeseen risk, as there\u2019s no guarantee the acquired company will perform well once it hits the market.<\/p>

    What happens after a SPAC merges with another company?<\/h3>

    After a SPAC merger, the newly formed company typically assumes the name of the operating company it acquired and its ticker symbol is changed to reflect the merger. As an investor, you have the option of continuing to hold the stock, or you can sell it as you would any other security through your brokerage account. What happens to the stock price depends on what company the SPAC merges with.<\/p>

    For example: the fantasy sports-betting operator DraftKings went public by merging with Diamond Eagle Acquisition Corp in April 2020 (NasdaqGS: DKNG). The stock has performed well, debuting near $10 per share and rising to all-time high of $71.98 in March 2021. Some investors speculate that the stock will continue to gain traction owing to the rise in online gaming and sports betting in the wake of the coronavirus pandemic.<\/p>

    On the other hand, Virgin Galactic (NYSE: SPCE) exemplifies exactly how tenuous and unpredictable SPAC mergers can be. The commercial spaceflight company went public via a SPAC merger with Social Capital Hedosophia in 2019. Shares launched at $12.34 apiece, but in the months following its release, prices fell to $7.25 in November 2019 before bouncing to an all-time high of $59.41 in February 2021. The stock has continued to rise and fall as traders hesitate on the market viability of a SPAC tourism investment.<\/p>

    Ultimately, there\u2019s no way to predict what will happen to a SPAC stock following a merger. Before you invest, find out if the SPAC you\u2019re interested in has a target industry or market sector, as this may help guide your decision.<\/p>

    How do I find SPACs to invest in?<\/h4>

    One of the best ways to identify SPAC investment opportunities is to stay informed. SPACs aren\u2019t as well-advertised as traditional IPOs. Hedge funds and institutional investors are typically the first to learn about SPACs, but you can stay abreast of upcoming SPACs by subscribing to investment news sources or by searching the NASDAQ website for ticker symbols that end with a \u201cU\u201d \u2014 a common identifier for publicly traded SPACs.<\/p>

    Pros and cons of investing in a SPAC<\/h3>

    Pros<\/h4>