What is a SPAC?

The  whole process starts with a “Special Purpose Acquisition Company”, a shell company that raises capital from various big investors. These are called sponsors. Once the shell company receives enough capital their shares get listed on the stock exchange. An US SPAC is usually listed at 10 USD per share and so far the only Finnish one was listed at 10 EUR per share. The price then changes over time with the market and this is the time where other investors can invest in the shell company. 

When the SPAC is listed on the stock exchange its purpose is to acquire another unlisted company with the money from the original investors. The incitement of creating a SPAC is to give greater opportunities to acquire larger unlisted companies and thereby get access to more candidates of acquisition. When another company is found and acquired the shell company’s shares are converted to the new company’s shares and the previous unlisted company starts trading on the stock exchange. For the company that wants to go public this is a quicker process compared to an IPO. 

Due to the fact that a SPAC is a newly established company without relevant historical data you as an investor need to rely on the sponsor’s track record and investment criteria. The first you should do as potential investor is to investigate who are the sponsors and what they have accomplished in the past.

The shell company in question has no own organization, generated income, or ability to deliver results. This makes it more difficult for potential investors to estimate the risk in the investment and what return to expect. It is also important to understand the terms in the prospectus. Before a candidate of acquisition is identified the shell company is just a big pile of money that is traded on the stock exchange. 

Another fact to know is that a SPAC is traded on the stock exchange for a limited time, usually up to 24 or 36 months. If the sponsor does not find a company to acquire the SPAC will be delisted from the stock exchange and after that liquidation. The remaining capital after costs for liquidation will be refunded to the investors. However, it is only the initial value of 10 USD or 10 EUR per share, minus costs that occurred during the planned acquisition, that is refunded. Let us say that you invest in a SPAC for 10 EUR per share you have a potential downside of 10 EUR (plus costs) per share. The price of a SPAC can increase only with rumours of a potential candidate of acquisition. There is no guarantee that the shell company finds a company to acquire.

Specific key risks

Investment in a SPAC is directly connected to risks of acquisition. Acquiring another company is an extensive and complicated process that involves large costs. These costs are charged to the shell company even though an acquisition is not completed, and that leads to a negative impact on the result. Furthermore acquisitions are related to large risks connected to the acquisition candidate. The ability to achieve a successful purchase is directly dependant on the sponsor. The SPAC itself has no own organization. It is the sponsor that provides his own investment organization for the work of identification, evaluation and acquisition of potential candidates.

There is a risk that the purchased company does not receive approval for listing on the stock exchange. The acquired business needs to meet the requirements of the exchange. If they do not consider the acquisition to fulfil the requirements it can lead to delays and additional costs for the SPAC in question.

The shareholders influence over which target company to acquire is limited. Before an acquisition is conducted the candidate has to be approved by the general meeting in the shell company. Each individual shareholder’s influence over which company to acquire is therefore limited. In connection with a business combination, a SPAC usually provides its investors with the opportunity to redeem their shares rather than become a shareholder of the combined company.  

Whether you are investing in a SPAC by participating in its IPO or by purchasing its securities on the open market following an IPO, you should carefully read the SPAC’s IPO prospectus as well as its periodic and current reports pursuant to its ongoing reporting obligations. It is important to understand the terms of your investment.  While SPACs often are structured similarly and may be subject to certain minimum exchange listing requirements, it is important to understand the specific features of an individual SPAC, including the equity interests held by the sponsor.