One-hundred sixty five companies listed initial public offerings on U.S. exchanges in the third quarter, a 126% increase versus Q2. This surge was largely driven by special purpose acquisition companies (SPACs), which represented 47% of all IPOs in the third quarter.
Notable SPACs include Bill Ackman’s Pershing Square Tontine Holdings (NYSE: PSTH) and Chamath Palihapitiya of Social Capital’s slew of SPACs with tickers IPOA (which acquired Virgin Galactic Holdings) through IPOZ.
In this article, we will take a closer look at SPACs, what’s driving their growth and important considerations for investors.
What Are SPACs?
Special purpose acquisition companies (SPACs) are companies formed to raise capital in an IPO with the sole purpose of using the IPO proceeds to acquire one or more businesses or assets that are identified after the IPO.
SPACs are shell corporations until they acquire a business. The SPAC process consists of three phases:
- The IPO, when the SPAC is publicly listed
- Target search, when the SPAC searches for businesses or assets to acquire
- De-SPAC, when the SPAC receives shareholder approval to consummate an acquisition
The money raised by SPAC IPOs is placed in a trust and can only be released if the company completes an acquisition ratified by a sufficient number of investors. SPACs typically have 18 months to carry out an acquisition or funds are returned to investors.
SPACs typically sell units priced at $10, with each unit consisting of common stock and warrants. After the IPO, the units separate into common stock and warrants that can be traded or used to buy additional shares once the SPAC target is determined.
While SPACs cannot mention target companies in their IPO filing, they can choose a specific industry or geography of focus. Several SPACs have formed targeting the health care, technology, retail, homeland security and government contracting sectors.
How Do SPACs Differ From IPOs?
SPACs can be seen as a “backdoor” to an initial public offering for private companies. Since the SPAC files a bare minimum registration statement, companies aren’t required to file an S-1 with the Securities and Exchange Commission. Companies also don’t need to do a roadshow to pitch to institutional investors. This makes the process of going public faster — reducing a company’s time to market from 12 to 18 months to 3 to 4 months.