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ELI5: What's SPAC?

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Special Purpose Acquisition Companies. A mouthful, luckily we can just call them SPACs. SPACs skyrocketed in popularity in 2020, raising over $50 billion dollars. More in a single year than in all the preceding decade. 

SPACs are shell companies who's sole purpose is to raise public money to acquire a private company - thus taking it public through the backdoor. SPACs are an alternative to the traditional IPO. 

IPOs can be a hassle, involving a lot of regulatory scrutiny, paperwork and hefty underwriting fees. It can take months to get everything together. SPACs sidestep all this.

SPACs are ran and operated by a sponsor. Sponsors are typically professional investors (hedge fund managers, venture capitalists) but given the recent craze, many celebrities have also entered the chat (that's always a red flag). 

Investors have no idea who'll be acquired. They're betting solely on the sponsor - why they're often called "blank check" companies. Sponsors are given money on confidence alone. 

Sponsors have 2 years to find a company to acquire or will have to return the money. This is good and bad. It's good in that sponsors can't just sit on the money. Bad in that it can incentive them to acquire companies that are less favourable just to close a deal. Sponsors gets 20% of the company they take public. A generous payment they wouldn't want to miss. 

SPACs are a cheap and fast way for companies to go public, and are even a better deal for sponsors. For investors, the value is more questionable. Investors are choosing a mystery box. It could be great, it could be a dud. Who knows?

All investing comes with unknowns, but SPACs takes it to the next level. It's a gamble, it the truest form of the word. 




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