Special purpose acquisition companies or SPACs for short are formed to raise capital through an initial public offering (IPO). The capital raised from investors is then used to acquire a private company. Also called shell companies or blank check companies, SPACS have become an increasingly popular alternative to the traditional IPO process. For example, between Jan. 1, 2020, and Aug. 21, 2020, SPACs raised $31 billion across 78 transactions, surpassing the capital raised by IPOs over the same time period. Interested in how to invest in SPACs? It’s important to weigh the pros and cons before diving in.
A financial advisor can help you sort through your options as you consider adding alternative investments to your portfolio.
What Is a SPAC?
A SPAC is a shell company that’s established in order to raise capital through an IPO, with the sole purpose of acquiring a private company. The target company doesn’t necessarily need to be identified right away; the SPAC can disclose which company they plan to acquire once the IPO is complete.
SPACs don’t have any ongoing operations, nor do they have products, services or revenue. Instead, the focus is on identifying a company that’s an optimal target for acquisition. For example, a SPAC may look for up-and-coming companies that are highly innovative or have significant growth potential but little revenue to speak of as yet.
Once the target company is acquired by a special purpose acquisition company, it’s able to have a publicly...
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