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What Is a SPAC?
Written by The Inspired Investor Team | Published on January 27, 2021
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Though the concept of a SPAC, which stands for Special Purpose Acquisition Company, has been around for decades, it has gained in popularity in recent years. Here is what you need to know about them: SPACs, also known as "blank cheque companies," are companies without any commercial operations, which are formed with the sole purpose of raising capital through an initial public offering, or IPO. With the funds raised through the IPO, a SPAC then aims to purchase (or merge with) another existing private company, which is operational.
Typically, the founders of the SPAC have expertise in a certain business sector or industry, and have the intention of pursuing deals within it. But while a SPAC may have a target company in mind to acquire, this information is kept confidential. Importantly, a SPAC generally has two years to make an acquisition. If two years have lapsed without an acquisition, the SPAC must return all funds to the investors.
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THINK OF IT LIKE THIS The farmer down the road is well-connected and informed. She has a track record of finding ways to increase her yield. She's confident she's going to augment her operation to boost the bottom line within the next two years. How? Will it be new machinery? Or maybe a new breed of livestock? That part is unknown. First thing first: she needs some cash to make it happen. That's where you come in, if you choose to. To make her vision a reality, she's collecting money, but she's not greedy – everyone who buys in gets a piece of any potential gains. With the buying power of many, she plans to acquire the means to, she believes, earn everyone who participates a pretty penny. Should she fail to acquire what she needs within a two-year time frame, everyone gets part or all of their money back. This is a risky proposition as there are many unknowns, including what it is that may ultimately be purchased with your cash (and whether you'll get a fair price for it or not). With all of this in mind, one question remains: Are you in or are you out? |
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