Note: I set out with a New Year’s resolution in January 2021 to write an article on SPAC IPOs. I first wanted to write an intro to traditional IPOs to help highlight the differences between the two. You’ll notice that aside from the IPO article, I didn’t publish any others in 2021. This break was mildly unintentional, mostly driven by a home remodel taking all my spare time & energy. However, in some ways I’m glad I waited to write the article. A SPAC article in early 2021 would have been in the middle of the hype, yes. One year removed, it’s intriguing to see the rise and fall of SPAC popularity, and we have far more interesting data to work with. 

Introductory Note: If you are unfamiliar with how a traditional IPO works, it might help you to first read my earlier article, More than you ever wanted to know about IPOs.

If you’re like me and follow business news with any sense of regularity, you noticed that in 2020 aside from well, everything else going on, 2020 was being called Year of the SPAC, or SPAC IPO. Now again if you’re anything like me you read those words and thought, “What on earth is a SPAC?”

A basic google search will tell you that a SPAC, or Special purpose acquisition company is a “blank check” company that is formed and raises money with the sole purpose of finding an acquisition target to take public. So…that’s very clear, obviously. I needed a bit more of an explanation and found this PWC guide called How SPAC Mergers Work along with this informative article Why companies are joining the SPAC boom.

In an attempt to make this information more accessible, let’s break it down. 

Step 1: A SPAC company is formed. Someone, anyone really now, who either knows what they’re doing or has a lot of money and a recognizable name, decides to put money into a SPAC.

Step 2: Raising Funds. The SPAC goes around calling all of their friends asking for money. You know that girl you haven’t spoken to since high school who suddenly wants you to buy into her MLM? Yes, it’s like that. Exactly that. Except pretend you actually want in and call her begging to be a part of it. This part is technically people buying into the IPO, and counts as the SPAC going public. Yes, this is very different from everything talked about in my IPO article. That’s kinda the point. 

Step 3: Buy the leggings. Begin the search. I was quite confused at first as to why SPACs are called “blank check companies.” I took this to mean investors were giving an unlimited amount of funds, but this is incorrect. The part of the check that they’re “leaving blank” isn’t the amount, but WHO they’re making the check out to. Because investors give their money to the SPAC to go buy….something hopefully worth the investment. So now that the SPAC has all this money, it’s time for them to decide what they’re going to buy. It’s basically the most expensive “surprise mystery subscription box” you can possibly find. Investors eagerly await to discover what company is inside the box.  Per the PWC guide, “Following the IPO, proceeds are placed into a trust account and the SPAC typically has 18-24 months to identify and complete a merger with a target company, sometimes referred to as de-SPACing.” 

Step 4: Open the box. SPACs will pick an acquisition target, and then a few things happen. First, they may or may not reach an agreement with their target. (Just because we want to buy you, doesn’t mean you want to sell to us). Also, investors might look inside the box and say “I got Goop? Yuck! I want my money back! Recently 94% of investors pulled out when a SPAC decided to acquire Buzzfeed. 

If a SPAC doesn’t reach a deal with a target, they have to give all the money back to the investors. This is known as a SPAC failure.  According to a March 2021 study called A Sober Look at SPACs, (I want to read this whole wonderful 100 page study so you don’t have to.) six SPACs failed to merge, and therefore liquidated, compared to 47 that successfully merged. This amounts to a failure rate of 11% from January 2019 through June 2020.

Step 5: Sign the deal. Assuming all goes well, a SPAC will find an acquisition target that likes them, and their investors like back. (Isn’t that all any of us want in life? To have the person / company we like to like us back?). They’ll sign a deal which merges the SPAC with the target, and.. now that acquisition target company is a public company. 

Wait, what? That’s it and now the target is a public company? What about all the pomp and circumstance, the S-1 and SEC comment letters? We have all this regulation around becoming a public company, and a SPAC just … skips them all?

YES. They’ve been around for ages, but weren’t very popular because they’re not the greatest investment vehicle, which I’ll get into in a moment, but this lack of regulation I think was fuel on the fire for the 2020 SPAC boom. As more and more investors got involved, it became a bigger problem for the SEC to start looking into, say “whoa there, hold your horses,” and begin working on new regulation.

I… still have questions. A couple of which are 1) Do SPAC IPOs have the same pricing inefficiencies as a traditional IPO? (One professor brought this up in grad school and I’ve been trying to comprehend it ever since) and 2) Apparently a SPAC can allow a company to go public as quickly as a few months, instead of the typical 12 to 18 month turn around. I’ve been an accountant on the inside of an IPO, and it takes time and training for your team to become accustomed to working under such rigorous deadlines. Most private companies aren’t audited at the same level of rigor as a public or preparing to file company, how can investors be sure these financials are up to snuff? 3) How do SPACs fare as an investment after taking their target public?

While you’re chewing on all that, I’m going to go read that 100 page study and come back with a deeper dive into SPACs. 

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