What is a Special Purpose Acquistion Company (SPAC). How does a SPAC work, and how do I buy SPAC stock? In this article, you will learn all about investing in a SPAC. You will learn what a SPAC is, what it means, and how it works. We will also tell you about the pros and cons, because the risks with SPAC stocks are higher compared to other types of investments.
Let's get started right away!
What is Special Purpose Acquisition Company (SPAC)?
Special Purpose Acquisition Companies, short for SPAC, is a company that is formed specifically for the purpose of raising capital through an IPO to buy an existing company. SPACs are also referred as "blank check companies" because they raise money from investors in an IPO (initial public offering) but have no specific business plan or assets at the time of the IPO. The money raised is held in a trust and used to fund the acquisition of a target company, which becomes a publicly traded company as a result of the merger.
The goal of a SPAC is to allow investors to participate in the upside potential of the acquired company while providing the target company with access to capital and a public market listing without going through the traditional IPO process.
A SPAC does not manufacture or provide any products or services. Typically, SPACs have only two assets: private investors' funds and the proceeds from an initial public offering (IPO). After a SPAC's initial public offering, its stock can be purchased on a public exchange. Following the acquisition, the SPAC is usually listed under the name of the acquired company or under a new name.
How does an SPAC works?
SPAC is an alternative route for small companies to go public. IPOs are the most commonly known method of entering the U.S. public capital market for private companies. However, Wall Street is currently focused on achieving a public listing for large, so-called "unicorn" companies, making access to this method difficult for smaller yet successful companies. In light of this situation, growth-stage companies have become increasingly interested in merging with Special Purpose Acquisition Companies (SPACs).
Typically, SPACs are formed or backed by institutional investors and Wall Street professionals. These individuals are known as sponsors of the SPAC. After the SPAC goes public through an IPO, it raises capital (SPAC IPOs are generally priced at $10 per share)by selling shares to investors. The proceeds from the IPO are placed in a trust account, which is held in escrow until the SPAC completes an acquisition.
The SPAC's management team is responsible for finding a private company that is interested in going public through acquisition by the SPAC. This process can take some time, and the SPAC generally has a deadline of about two years from the IPO to complete an acquisition. If the SPAC is unable to complete an acquisition within this timeframe, it must return the funds in the trust account to its investors and dissolve the company.
Once the SPAC completes an acquisition, the private company becomes a publicly traded company through the SPAC. Investors in the SPAC have the option to either take their shares back or exchange them for shares in the merged company. The SPAC sponsor generally receives about 20% of the merged company.
How to buy Special Purpose Acquisition Company?
There are several ways to buy shares in a special purpose acquisition company (SPAC). You can buy a SPAC through an online broker, stock exchange, or Initial Public Offering (IPO). Buying a SPAC through an online broker, also called an investment platform or investment app, is an easy way to begin your investment.
The process of opening an account with a broker to buy SPACs is simple. You open an account with the best investment app of your choice. You transfer money that you can spare. You research potential investments, and buy shares from them. In this respect, buying a SPAC is exactly the same as buying a stock.
If you know the symbol or name of the company, log into your account and look up that company. Specify the number of shares you want to buy in the buy order and execute your first transaction. After you buy SPAC shares, track your investment and adjust your portfolio as needed.
But beware: SPAC stocks contain a lot more uncertainty. In a sense, it is speculation. This means much more risk than other types of investments. Therefore, first learn about all the possibilities, from ETFs to real estate funds and commodities. Invest in your own knowledge!
Here are the three online brokerages where you can buy SPAC easily:
Freedom24 is a European broker, which is one of the most popular brokers for buying and selling shares online. They have a large global offering of stocks, ETFs, and bonds, which can be useful for beginning or advanced investors. You can open an account with them using your credit card details or by setting up an online bank account with them (they will then send you an invoice every month). It's fast and easy. Also, Freedom24 is unique in that they are the only provider of IPO stocks, allowing you to buy IPO shares before the IPO at the introduction price.
eToro is a global online trading platform that allows you to buy and sell a wide range of securities, including stocks, ETFs, and cryptocurrencies. It also has a large selection of assets and a range of educational resources to help you make informed investment decisions, making it one of the best places for beginners to start investing. You can trade as little or as much as you want, and there are no restrictions on how often you can invest. They also offer a feature called "CopyTrader," which allows you to automatically copy the trades of other successful investors on the platform.
3. Mexem / Interactive Brokers
Mexem / Interactive Brokers is a great option for those looking for an online broker to buy a special purpose acquisition company (SPAC) with a low minimum deposit requirement and no fee trading fees. The platform offers the same types of services as Freedom 24 and eToro but also includes a mobile app so that you can access your account from anywhere in the world. It also offers free educational videos to help you learn how to trade more effectively before diving into real money markets!
Risks of Special Purpose Acquisition Company
SPACs are subject to the following risks:
- The SPAC could fail to acquire a company within the relevant timeframe. When this happens, the investor, who was hoping for high returns on their investment, may only receive interest after 2–3 years.
- Since SPACs are becoming more common, companies looking for acquisition have many options, resulting in negotiating better terms for themselves and less favorable terms for investors.
- Generally, SPACs that fail to acquire a company will return their investors' money, but this does not always happen. As a result, it is vital that investors read the prospectus carefully before investing.
- One of the main risks of investing in a SPAC is the uncertainty about the target company that the SPAC will eventually acquire. The value of your investment will depend on the success of the target company, which can be difficult to predict.
- A SPAC's shares may fall after its IPO. A SPAC's value may be artificially inflated by swirling rumors when it plunges suddenly for various reasons.
- In the initial IPO of a SPAC, investors are not informed about potential acquisition targets. It is, therefore, difficult for people who purchase stocks to know what they are actually purchasing.
Special Purpose Acquisition Company (SPAC) vs. Initial Public Offering (IPO)
A special purpose acquisition company (SPAC) is an entity that acquires companies or assets on behalf of another party. It can be an asset-based acquisition or a stock-based acquisition. However, an initial public offering (IPO) is a way for a company to raise money by selling shares to the public. That is usually done through an exchange made with investors. The company then receives funds from investors and uses them to fund its operations or expand its business into new ventures.
A SPAC's structure differs from an IPO's structure as well. Trusts are typically used as SPAC structures, while corporations are usually used as IPO structures. It can have an impact on the rights and responsibilities of shareholders. Also, SPAC's pricing can differ from an IPO's. While IPOs are typically priced based on market conditions, SPACs are valued higher than their target companies.
There are also differences in risk profiles between SPACs and IPOs. Due to the uncertainties about the target company and the possibility of diluting shareholder value, SPACs are riskier. IPOs can also carry risk, but the risk is typically lower because the company has a track record and financial information is available to investors.
SPAC vs. DPO
The meaning of DPO stands for Direct Public Offering. The main difference between these two types of offerings is that a SPAC only deals with assets, while a DPO deals with both assets and equity. The use of proceeds from a SPAC or DPO can also differ. In a SPAC transaction, the proceeds from the sale of shares are typically used to fund the acquisition of the target company. In a DPO, the proceeds from the sale of shares may be used for a variety of purposes, such as expanding the business, paying off debt, or repurchasing shares.
SPACs and DPOs can also differ in size. SPACs are usually larger, as they are funded by a parent company and are intended to acquire a target company. DPOs are typically smaller, as they involve the sale of shares in a privately-held company. Moreover, The regulatory environment for SPACs and DPOs is also different. SPACs are subject to the exact regulatory requirements as other publicly-traded companies, while DPOs may be subject to different regulations depending on the jurisdiction in which they are conducted.
SPAC vs. ICO
ICO stands for Initial Coin Offering. There are major differences between SPAC and ICO. SPACs are companies formed to acquire a company in a specific industry. They usually have a specific purpose and focus, which can range from buying an existing company to building a business from the ground up.
An Initial Coin Offering is the first time a crypto coin goes to the crypto market. It is possible to invest in an ICO. This means that you buy a crypto coin before it is launched on the crypto exchanges. In this case, however, you know what kind of crypto coin it is. This is different from SPAC shares, where it is still unclear which company is being acquired. With an ICO, you know exactly what crypto project is involved.
The other main difference between SPACs and ICOs is the type of assets that are being sold. SPACs sell shares in a company, while ICOs sell a new cryptocurrency. Additionally, the investor base for SPACs and ICOs can also differ. SPACs tend to attract institutional investors, while ICOs may attract a more diverse group of investors, including retail investors and cryptocurrency enthusiasts.
Conclusion on SPAC shares
You now know what a Special Purpose Acquistion Company is. You now know what a SPAC means. With that, we can conclude that buying SPAC stock is extremely risky. SPAC shares are a clever construction for management. For the investor, however, it is a great uncertainty. If management fails to buy the target company, then the SPAC is meaningless. Or the SPAC buys a less-potential company. In such cases, the stock price will fall, and investors experience large losses
Our tip: Don't invest in SPAC stocks. Learn to invest successfully. Invest in your own knowledge. Immerse yourself in Value stocks, dividend stocks, or check out the best ETFs. In terms of long-term investing, that offers a little more security (but unfortunately no guarantee).
Disclaimer: This article may contain affiliate links from our partners. This article in no way contains investment advice. The analysis may not be complete. You are responsible for your own investments. Investments in securities and other financial instruments always involve the risk of losing your capital. IPO investing, buying stocks at IPO prices, may involve additional restrictions. Past predictions or performance are no guarantee of future results.