If you watch the financial news, you’ve probably heard the word “SPAC” quite a bit over the last year or so. While SPACs are popular investment and trading vehicles right now, many people don’t know what they truly are.
SPAC (Special Purpose Acquisition Company) are also called “blank check” companies because they have no business operations. These are businesses formed by investors, sponsors and even celebrities that have no operation of their own. Examples of celebrities who have jumped on the SPAC bandwagon include Shaquille O’Neil, Colin Kaepernick and A. Rod.
These companies collect money from investors with the intention of using those proceeds, at some point in the future, to purchase a private company and take it public so that it trades on an exchange. The blank check moniker comes from the fact that investors are putting money into these companies and trusting that those in charge will invest the money wisely. Management essentially has a blank check from their investors to purchase whatever they choose, whenever they choose.
Traditionally, investment banking firms perform the service of taking companies public. However, this can be a lengthy and expensive process. Using a SPAC that has an experienced partner can greatly reduce the time and cost of listing on a stock exchange.
SPACs have become popular in the last decade, and even more so in 2020 and 2021. In 2019 more than $13 billion dollars worth of deals listed on the stock market via SPACs and through August 2020, the number was approaching $21 billion dollars. (according to Investopedia )
Many, but not all, popular SPACs are in the electric car business and hope to become the next Tesla. Some SPACs that have received the most attention from investors include Lordstown Motors (an electric car company), Pershing Square Tontine Holdings (which has not publicly specified their target industry), Churchill Capital which recently announced a merger with Lucid Motors (another electric car company), and Starboard Value which has announced that they will take Cyxtera Technologies public.
It is easy to get in over your head with SPACs. These investments have become popular amongst traders, but they tend to be very volatile. Check out this chart of Lordstown Motors.
Before investing, do your homework, understand what you’re investing in and feel free to give our team a call if you need help.
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