2020 was the ‘year of the SPAC’, with 200 SPACs raising around US$64 billion and making companies available to everyday investors like us - so they're kind of a big deal. But what exactly are they?
What are SPACs?
Do not adjust your screens; we haven’t dropped an ‘e’ from space; SPAC stands for Special Purpose Acquisition Company.
A SPAC is essentially a shell company set up by investors with the sole purpose of raising money on the share markets to merge with a private company and take it public, where two become one. SPACs are becoming popular options to secure a public listing on the share market faster than a traditional initial public offering (IPO) process.
But be warned, there are risks; with SPAC hype, investors have lost money on the more speculative ones. Compared to a traditional IPO, SPACs are sometimes less transparent, with less information released to the public.
SPACs themselves make no products, offer no services and don’t sell anything. They exist purely to raise the money needed to merge with a private company to take it public. The merged company then uses the money to deliver on its growth plans.
How do SPACs work?
Investors on Hatch can buy shares in a SPAC anticipating that it will successfully merge with a private company but it’s not guaranteed, so buyer beware.
Any proposed merger will have to be approved by shareholders in a vote - and if you own shares in a SPAC, you get voting rights too!
Once the merger has been approved and completed, the SPAC ticker in the investor’s portfolio automatically updates to the new ticker for the merged company.
More about IPOs