What exactly is a SPAC?
A SPAC is a shell company that allows firms to bypass the traditional initial public offering (IPO) process to list on a stock exchange.
How do they do that?
An investor or a group of investors, also known as “sponsors”, set up a company with no business operations or employees (that’s why it’s called a shell company) and list that company on an exchange.
That listing raises a pool of cash. The SPAC then takes that pool of cash (aka – blank cheque) and hunts around for an attractive startup to buy. Typically, if they don’t find one within two years, then the SPAC liquidates.
What kind of startup are they looking for?
Usually a late-stage one with a bright idea and a promising future – one that wants to raise capital by going public but doesn’t want all the hassle, red tape, uncertainty and steep fees associated with an IPO.
So what happens when the SPAC buys a startup?
Once the SPAC acquires or merges with a startup, the combined entity is a publicly traded firm listed on an exchange. That’s how it offers an alternative to a traditional IPO for taking a company public.
Are SPACs something new?
SPACs have been around for many years, but only recently have they have become popular as a way for entrepreneurs to raise capital and list their firms on a stock exchange.
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SPACs IPO in America from 2019 to 11/3
So how do they differ from traditional IPOs?
A SPAC can offer a much faster route than a traditional IPO for a startup to list on an exchange, bypassing investor road shows, a lot of regulatory red tape and some steep investment banking fees to boot.
The startups also can negotiate their valuation, which can be comforting when markets are volatile – and they were very volatile last year.
Are SPACs spreading around the world?
Yes. Several Asian countries from Hong Kong to India, for instance, are starting to look at SPACs more seriously. But they appear to be treading cautiously.
In the region’s financial hubs of Hong Kong and Singapore, regulators are considering tighter frameworks than in the US for listing SPACs, according to Bloomberg.
In Hong Kong, regulators are reportedly considering setting special conditions for sponsors of SPACs, including having a track record for managing money.