Investors in a special purpose acquisition company (SPAC) have to rely on the previous track record and investment criteria of the company’s sponsors because the company has no previous operating history. So when investing in a SPAC, you should carefully find out who the company’s sponsors are and what they have previously achieved.
A SPAC usually has a very small organisation and it has no income and can’t generate any profit. For this reason, it’s difficult for potential investors to assess the risks and expected returns of the company. It’s also crucial that you carefully read the SPAC’s listing prospectus. Before finding a company to acquire, a SPAC is, for all intents and purposes, a pile of cash listed on the stock exchange searching for something to buy.
It’s also important to note that a SPAC is set up for a limited period of time, usually 24–36 months. It must find a company to buy out within this period, or else it will be dissolved and the cash it has collected will be returned to its shareholders, minus expenses. For example, if you bought a SPAC listed on the Helsinki Stock Exchange for 10.50 euros per share and the company fails to buy a company to acquire within the set period, you would be reimbursed 10.50 euros minus expenses and your loss would be equal to those expenses.
There are no guarantees that a suitable acquisition target can be found on time, which is something to keep in mind. Another thing you should be prepared for is that potential rumours about the company to be acquired as well as about the outcome of acquisition negotiations can cause large swings in a SPAC’s share price.
When investing in a SPAC, you’re exposed to the risks involved in business acquisitions. Buying another company is always a long, complex and costly process. The costs of the process are paid by the SPAC even if the business acquisition is not completed. In such a case, these costs would have a negative impact on the value of the SPAC and on potential future business acquisitions. The great risks involved in a business acquisition also impact the company to be acquired. The success of the business acquisition is largely dependent on the competence of the SPAC’s sponsors.
Another risk is that the acquired company isn’t granted permission to list its shares for public trading. The acquired company must also meet the requirements of the stock exchange and local legislation. Potential additional demands by the authorities or the stock exchange could result in delays and additional costs to the acquisition.
The shareholders of the SPAC have little influence over the selection of the acquired company. However, before a business acquisition can be completed, the SPAC must seek approval for it at a general meeting of the shareholders.
In such a meeting, every shareholder can vote on the company to be acquired in proportion to their shareholding. Shareholders of the SPAC who don’t accept the acquisition target usually have the option of redeeming their shares at a predetermined price minus expenses. This price is usually the SPAC’s IPO listing price but you can find more detailed information on it in the SPAC’s listing prospectus.
Read the listing prospectus carefully
Investors should carefully read a SPAC’s listing prospectus before making a final investment decision if they intend to invest in the company through its IPO. On the other hand, if you plan to buy shares once they are publicly traded, you should carefully read the SPAC’s regularly published reports before making your investment decision.
In general, it’s important that you know the companies you invest in. Although SPACs are structurally similar to one another and their listing is subject to certain minimum requirements of the stock exchange, it’s crucial to understand the various features of a specific SPAC, including the interests of its sponsors.