What You Should Know Before Investing in a Blank Check (SPAC) Company
In 2020, more companies than ever have chosen to go public through SPAC deals instead of the traditional IPO process. SPAC stands for special purpose acquisition company. These companies, sometimes called "blank check companies," exist exclusively to raise money to acquire a private company and instantly make it public.
You can view SPACs as doing the IPO heavy-lifting on behalf of the companies they will acquire. As the SPAC space continues to sparkle, you may be curious about how to invest in such an IPO and whether you should.
Why invest in a SPAC instead of traditional IPO? Beyond knowing how to buy in, it helps to know what you’re getting into with a SPAC.
How a SPAC IPO is different from a traditional IPO:
In a SPAC IPO, a shell company goes out to raise money from investors. The shell company doesn't have commercial operations or financial statements to show investors. Instead, its promise to investors is that it will use the funds to purchase a business that can generate good returns. The SPAC takes the money and keeps it in a trust account until it finds a suitable target business to acquire. SPAC IPOs are often priced at $10 per share.
In a traditional IPO, a company goes out to persuade investors to put money in the business. That often involve roadshows where the company’s executives meet with large potential investors, discuss the business and share financial statements. In the standard IPO process, companies price their stock and determined the deal size based on investor demand.
The biggest difference is that, in a traditional IPO, investors know in advance the business they’re putting money into. When a SPAC goes out to raise money, however, investors have no idea what business it will acquire. That’s why they are also called blank-check companies. A SPAC may have to return the money to investors if it can’t find a suitable business to buy in two to three years.
So, why invest in a SPAC IPO?
In a traditional IPO, most investors don’t get the chance to purchase the stock at the IPO price. Stocks are often sold to accredited investors first in pre-IPO transactions. You must have a certain level of net worth and trading experience to qualify as an accredited investor. Therefore, many investors fine that investing in a SPAC before they acquire a target business is the closest thing to buying a pre-IPO stock.
For private companies, these blank check deals offer a cheaper way to raise capital to go public. Moreover, companies taking the SPAC route are guaranteed to raise a certain amount of money. In a traditional IPO, a company may raise less capital than it wanted if the demand for the stock is low.
There's been a record amount of SPAC IPOs in 2020.
If you’re searching for SPAC IPOs to invest in, you’re spoiled for choice. There have been a record number of these shell companies in 2020: more than 247 in 2020, which have raised more than $82 billion combined.
Notable SPAC IPOs in 2020 include, DraftKings, which merged with Jeff Sagansky’s Diamond Eagle Acquisition SPAC. Virgin Galactic merged with Chamath Palihapitiya’s Social Capital Hedosophia SPAC to go public. Nikola combined with VectoIQ SPAC to enter the public market.
How to buy SPAC IPOs:
There are several ways you can invest in a SPAC IPO. SPACs themselves go through the traditional IPO process. If you want to buy a SPAC’s pre-IPO stock, you can watch out for filings on platforms like SPAC Research and SPAC Insiders. If you have identified an opportunity, you can contact them about how to buy the IPO stock.
You may also reach out to your broker of wealth manager to see if they can help you invest in an upcoming SPAC IPO. Bear in mind that you may require a certain level of net worth to invest before it comes to the public market.
If you can’t access a SPAC’s pre-IPO stock, you can still invest in pre-deal SPAC stock after it goes public. SPAC stocks often soar after they announce a deal to merge with a private company. Once a SPAC debuts on the NYSE or Nasdaq, you can buy it through your regular broker. Bear in mind that a SPAC’s name and stock ticker symbol will change after it merges with a target company.
Now you know how to buy SPAC IPO. But bear in mind that the success of SPACs primarily depends on the reputation of their management team. Look at their track record (if any) with bringing successful companies to market.