IPO trend: Are SPARCs the next SPACs?

Posted: 7 December 2021 11:21 am
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Hedge fund manager Bill Ackman threw his clout behind a new twist on public offerings that could bring more investors into IPOs.

SPACs surged in popularity in 2020 and most of 2021 because they offer a simpler way to take a company public — and potentially high returns for investors. This was especially true if the SPAC merged with a popular company like Lucid Motors, Virgin Galactic or DraftKings.

The next big thing in initial public offerings could be the SPARC.

A SPAC is a special purpose acquisition company — often called a blank check company — whose only goal is to find another company and merge with it, thus bringing the new company public quicker than starting the IPO process from scratch. A SPARC — a special purpose acquisition rights company — offers some additional twists.

Bill Ackman, a hedge fund manager and the CEO of Pershing Square Capital Management, recently filed with the Securities and Exchange Commission (SEC) to offer a SPARC. If the filing goes through, SPARCS may be the trend in IPOs for 2022.

A SPARC doesn’t give you shares — only the rights to buy them

Bill Ackman’s SPARC is similar to a SPAC. However, instead of selling shares to investors for $10 each like a SPAC, it gives them special purpose acquisition rights (SPARs) for $0 each.

Only when the SPARC finds a target company will it ask the investors to put up the money, so the SPARC could take the target company for an IPO. The investors who own the special purpose acquisition rights have the right to buy shares of the new company at IPO prices.

Bill Ackman’s SPARs will each be exercisable for one share of the target company with a minimum exercise price of $10.00 per share. But this price isn’t set in stone. The SPARC may seek a larger amount per share from investors.

SPARCs may be superior to SPACs

The SPARC doesn’t raise money in advance as a SPAC would; it simply gives away purchasing rights for free, which can then be traded on the stock market. And if the SPARC finds a solid target that the investor believes will perform well after the IPO, they can exercise their rights and purchase the shares.

With a SPAC, on the other hand, you’re buying without knowing the target company until an official announcement is made.

And the cool thing is — once the SPARC raises money and takes the target company public, it will give rights to investors who bought the company for a new SPARC that would go looking for another deal. So you get a chain of SPARCs that keep raising funds and finding new target companies for IPOs.

In the case of Bill Ackman’s SPARC, the investors purchase the rights to buy his Pershing Square Tontine Holdings SPAC.

Here’s how Bill Ackman’s SPARC will work

Suppose each SPARC right is worth $5 on the market. You buy the right for $5 on the stock market, and then Bill Ackman announces a deal worth $30 per share. After the IPO, the price goes up to $45 in the first few days of trading.

You exercise the right to buy shares at an IPO price of $30, plus the $5 you paid for the rights, and you sell them for $45, thus pocketing the difference for a 28% gain. Another alternative is to simply sell your SPARC rights before the company goes public.

If you keep your rights and buy the share of the new company, you get free rights for Ackman’s new SPARC. If you exercise your rights in that company as well, you would get free rights for a new SPARC and so on. The idea is to incentivize investors to buy the shares at IPO. If successful, this can be a lucrative investment in the long run.

It may benefit the companies going public as well

If a company is looking to go public, they may compare the fees and conditions to go public through a SPAC, a SPARC or the traditional IPO route with investment bankers.

For example, if an investment bank charges between 1% and 5% of the money raised in the IPO, the SPARC won’t charge anything. However, in the case of Bill Ackman’s Pershing Square SPARC, the target company has to give Pershing Square warrants to 5% of the company at a 20% premium to the IPO prices.

There are hurdles

SPARC warrants aren’t allowed to trade on the New York Stock Exchange (NYSE) yet. The NYSE wants to change the rules and allow for the warrants to trade, but the decision ultimately falls to the SEC. If the SEC allows SPARC warrants on the exchanges, we may see a new hot trend in 2022.

The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

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