SPACs, or Special Purpose Acquisition Companies, are growing in number, mobility, and popularity in the U.S. A SPAC is a specially designed shell that builds capital reserves through the selling of company stock shares in what operates as a virtually empty trust. A SPAC takes in capital by selling company shares of itself to the public market and then uses those assets to purchase and take public companies through the SPAC IPO process for the U.S. and global market.
Investors are purchasing company shares of the SPAC directly, yet reaping the rewards of its holdings in a target company that will eventually come under the firm’s control. In a sense, this operates much like an index fund in which the shareholder owns portions of a commodity that takes positions in other companies rather than engaging in some industrial sector on its own. Think of Nasdaq 100 rather than Microsoft, Apple, or Nvidia.
How do SPACs work?
This is a far more rapid trajectory to listing on the public market than the traditional IPO route, and as a result, SPACs are capable of a unique measure of mobility on behalf of their investors. Investors and venture capitalists are taking note, and the listing of target companies on the public market is booming through this mechanism. In the first ten months of 2020, there were 165 IPOs in global markets and SPAC arrangements accounted for 96% of all public offerings.
What alternatives to SPACs exist in the marketplace?
SPAC firms require significant internal regulation in order to continue operating at a high level, and the market for other stock and public listings is continuing to compete with this growing framework. ESOP arrangements, for instance, are a popular way to create a huge boost in morale within a company looking to take on larger competitors in their field.
The ESOP model (Employee Stock Ownership Plan) is a solid option for many firms. ESOPs provide a unique and powerful incentive for employees to take part in the future successes of their company in a more direct way. Search for “ESOP defined” for a more in-depth analysis of the ESOP approach.
As well as the ESOP model, direct listing and traditional IPO options exist, yet they are more costly for the companies themselves and require far greater public scrutiny.
In the SPAC approach, a company that is looking to turn toward the public marketplace must work with an investment bank—the SPAC firm—in order to create a plan of attack for transforming their operation into a shareholder’s structure. The SPAC essentially purchases the company and then does all the heavy lifting to make these structural changes required of the firm in order to hit the open market at an opening bell in the near future.
How can a SPAC outfit maintain positive cash flow and continued success?
A SPAC must prioritize internal metrics and a huge commitment to long-horizon research. SPACs take in capital by selling shares but are entrusted by their investors to make good decisions with those finances.
Unlike a company that trades in a known good that’s worth a quantifiable value (Johnson & Johnson, Bank of America, or Home Depot, for instance), SPACs promise to purchase valuable assets down the road without the benefit of a long trending stock price or corporate financials to back up those claims.
This is where SPAC audit services come into play. In order to perform at or above target, SPAC operations must continually review their internal processes and prioritize the exploration of potential companies for acquisition on a rolling basis. Audits are crucial to the continued health of a SPAC organization, and they keep the business operating without a hitch.
SPACs are a fascinating addition to the public marketplace and offer an alternative option to companies that may not want to wade through the year-long process of public listing.