The filing simply states the management bios, the ticker symbol, the name, and how it’s different from other SPACs. Then, to actually take the SPAC public, the trading and execution services team and its lawyers prepare and file the S-1 registration statement with the Securities and Exchange Commission — just like anyone else seeking to IPO.

After initially rising to around $100 per share after the deal was announced in the spring of 2022, DWAC shares were trading sharply lower at just around $18 toward the end of 2022. The route to public offering using a SPAC may take a few months, while a conventional IPO process can take anywhere from six months to more than a year. The funds that SPACs raise in an IPO are placed in an interest-bearing trust account that cannot be disbursed except to complete an acquisition. In the event it is unable to complete an acquisition, funds will be returned and the SPAC will ultimately be liquidated. In the end, SPACs can offer an opportunity to speculate on something new and exciting.

However, after an IPO, the price of the pre-acquisition SPAC may vary wildly depending on market conditions, rumors surrounding the shares and other factors. This year, it hasn’t been unusual to see a SPAC trade at $12 or $13 per share, even after going public at $10. Once a deal has been announced, the premium can swell even further.

Additionally, the owners of the target company may be able to negotiate a premium price when selling to a SPAC due to the limited time window to commence a deal. Being acquired by or merging with a SPAC that is sponsored by prominent financiers and business executives provides the target company with experienced management and enhanced market visibility. SPACs are commonly formed by investors or sponsors with expertise in a particular industry or business sector, and they pursue deals in that area. SPAC founders may have an acquisition target in mind, but they don’t identify that target to avoid disclosures during the IPO process. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Neither Schwab nor the products and services it offers may be registered in your jurisdiction.

  1. Compared with traditional IPOs, SPACs often offer targets higher valuations, greater speed to capital, lower fees, and fewer regulatory demands.
  2. “SPACs perform best in the period following their definitive merger agreement announcement, but before the merger actually closes,” YCharts writes in a report on special purpose acquisition companies.
  3. Recently, the SEC warned investors against buying into a SPAC just because it has a celebrity name attached to it.
  4. SPACs have been around for decades, and in the past, they’ve had a bad reputation for scamming investors.

A company may also opt for a SPAC over an IPO to democratize the stock purchasing process. Since SPACs themselves are public companies basically from the beginning, anyone can by extension invest in the private companies they’ll acquire at a relatively low price of about $10 a share. A special purpose acquisitions company is essentially a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company.

Beyond that, most experts recommend researching successful SPACs and keeping track of the companies that launched those SPACs. By investing in SPACs launched by companies with a strong record of success, you’ll boost your odds of turning a profit on your investment. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

Oftentimes, multiple SPACs will be competing for the same private company in what’s now known as a “SPAC-off.” A private company will then weigh the valuation, cash, investors, and guidance each SPAC can provide. For example, the team would receive 2.5 million shares on top of the 10 million shares issued in the IPO. But those 2.5 million shares won’t be worth anything until the SPAC merges with a private company.

Shares no longer represent just a shell company, but a more concrete opportunity that might very well generate large profits down the road. “SPACs perform best in the period following their definitive merger agreement announcement, but before the merger actually closes,” YCharts writes in a report on special purpose acquisition companies. “During this lifecycle stage, 70% of SPACs gained value and 46% outperformed the S&P 500. From a SPAC’s IPO until its definitive merger agreement announcement, just 15% beat the S&P 500 – this is the most speculative period for SPACs.”

What Is a SPAC?

Blankfein also said that SPAC sponsors, who are mostly tasked with finding a workable acquisition within two years and not necessarily the best possible deal, are not incentivized to avoid having the SPAC overpay for the target company. While the SPAC merger process does require transparency regarding the target company, former Goldman Sachs CEO Lloyd Blankfein told CNBC recently that the due diligence of the SPAC process is not as rigorous as a traditional IPO. At this point, stockholders can redeem their shares if they don’t like the deal.

How can an individual invest in a special purpose acquisition company (SPAC)?

If the SPAC does not make an acquisition (deals made by SPACs are known as a reverse merger) within a specified period of time after the IPO, those funds are returned to investors. Subsequent to the IPO, a SPAC may raise additional capital via a PIPE (private investment in public equity) and/or debt financing. For their investment, investors usually receive SPAC shares plus warrants. A warrant provides an investor with the right to buy additional shares at a later date at a fixed price. SPACs are created with the sole purpose of raising money through an IPO, or initial public offering, acquiring a private company and then taking that private company public.

What is a SPAC?

“The blistering pace of issuance is likely unsustainable,” David Kostin, Goldman Sachs’ head of U.S. equity strategy, said in a note to clients. “SPACs could generate more than $700 billion in acquisition activity in the next two years.” “This is unlike anything else in my career,” Grantham told Financial Times. So unsurprisingly, the rapid rise in SPACs’ popularity have come with some wild price swings. And they’re still attracting plenty of investor interest, even after some of the early-year’s froth wore off. Many or all of the products featured here are from our partners who compensate us.

Special Purpose Acquisition Company: What Is A SPAC?

And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. That’s why you might opt for a SPAC-focused ETF if you’re dead set on SPACs or want to add them to your portfolio for diversification. “It gives people exposure to the growing SPAC space in lieu of betting on one deal because not every one of them is going to be a winner,” Jablonski says. With large institutional investors and other billionaire backers launching SPACs left and right, the trend is unlikely to disappear overnight. At last, Klymochko said the SPAC “changes the name and ticker symbol, and then they’re off to the races” as the new public company.

“The SPAC has become a vehicle for private companies to get into the public market sooner and faster and, in a sense, a little bit easier,” said Yelena Dunaevsky, a transactional insurance broker at Woodruff Sawyer who specializes in SPACs. Many celebrities, including entertainers and professional athletes, became so heavily invested in SPACs that the SEC issued an Investor Alert in March 2021, cautioning investors not to make investment decisions based solely on celebrity involvement. As many as 70% of SPACs that had their IPO in 2021 were trading below their $10 offer price by the end of that year, according to a Renaissance Capital strategist. This downward trend could signal that the SPAC bubble that some market experts had predicted may be bursting. Returns from SPACs may not meet expectations offered during the promotion stage.

Venture capitalist Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million before listing the company in 2019. Also known as blank check companies, SPACs have existed for decades, but their popularity has soared in recent years. In 2020, 247 SPACs were created with $80 billion invested, and in 2021, there were a record 613 SPAC IPOs. Investors who are interested in SPACs should spend time researching the terms of the investment. A good place to start would be to carefully read the SPAC’s IPO prospectus, as well as the periodic and current reports filed with the SEC.

Our partners cannot pay us to guarantee favorable reviews of their products or services. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree. A majority of shareholders have to agree it’s a good deal, but Klymochko said he’s never seen a deal get voted down. But in 2020, the number of SPACs on the market quadrupled from the year before, according to SPAC Insider data. Already this year, the number has already surpassed 2020’s record with 298 SPACs and more than $97 billion raised.