My goal for 2021 is to grow my wealth at a faster rate than I did in 2020. To accomplish this I need to take more risks and educate myself on more investment options. So I started 2021 off by learning about SPACS.
There is still a lot I need to learn about SPACs. But so far I’ve gained a beginning understanding of SPACs. While I still have much to learn, this is the simplistic, beginner’s guide to understanding SPACs. Hopefully, it can help you in your investment decisions and you’ll no longer be lost when you hear them being discussed like I was in 2020.
SPAC stands for Special Purpose Acquisition Company. They are a way of bringing companies public. SPACs offer a “simpler” and quicker alternative to the traditional IPO process and while they have been around for decades, they have become popular in recent years.
This last year was a record-setting one for SPACs. The gross proceeds for SPACs in 2020 was higher than in 2019 and 2018 combined. There were also over 100 SPACs in the year, a record number.
Some popular companies that went public via a SPAC include DraftKings, Nikola, and Virgin Galactic.
Much of my confusion from trying to learn SPACs came from all the finance terms used when explaining how they work.
A blank check company is a company that has no business. They don’t buy, sell, or make products. It is just used as a way to gather funds that will be used to take another company public.
The life cycle of a SPAC is multi-stepped. The blank check company is formed. It gathers funds. It then IPOs. It then announces the private company that it will merge with. The companies merge and now the private company is publicly traded.
That’s the basic step-by-step process. If any of that was confusing or not enough detail, let me provide an example.
Social Capital Hedosophia Holdings Corp. V ($IPOE) is an example of a SPAC in progress. It was founded by Chamath Palihapitiya, a venture capitalist. At some point, the company was created. Palihapitiya and others researched potential private companies they wanted to take public. Once they found a suitable company, (I assume) they met with executives of the company and agreed to take it public. Then they went to investors and raised capital to take it public.
On November 30th, IPOE started trading. It continued trading for weeks with not much activity. Then on January 7th, Palihapitiya announced $IPOE was merging with SoFi (Social Finance, Inc.,) the online personal finance company. The stock price jumped up on January 7th on the news, because before no one knew would they would merge with. The stock will soon change its name and symbol to reflect SoFi and effectivity becomes SoFi’s stock and not Social Capital Hedosophia Holdings Corp. V.
What Social Capital Hedosophia Holdings Corp. V (a publicly-traded, blank check company) did was merge with SoFi (a private company.) Now (assuming the merger is approved via a vote) the companies are merged and SoFi is essentially a publicly-traded company.
Before the merger can be complete though, shareholders vote to approve the agreement. I imagine 99% of the time it is approved, since the purpose of the blank check company is to bring another company public.
I’ll provide another example of a company that is complete with the process. Social Capital Hedosophia Holdings Corp. I ($IPOA) was another of Palihapitiya’s holding companies. In Q4 2019, it was announced it was merging with Virgin Galactic, the American spaceflight company founded by Richard Branson. Now Virgin Galactic is trading as $SPCE.
There are several components I still do not understand related to SPACs.
- It seems all blank check companies going through the SPAC process go public at $10 a share. I am not sure why, but that seems to be a common theme.
- SPACs have two years to complete an acquisition or they must return their funds to investors. This is from Investopedia. My reading, based on this, is that if you invest and the blank check company does not merge with a company to take public, you would get $10 back. But I can not confirm this as of right now.
- For each blank check company, before it merges with a private company, there are also tickers that end in either /U or /W. For example, IPOD, IPOD/U, and IPOD/W. The IPOD/U is known as units and IPOD/W as warrants but I am not familiar enough yet to speak confidently on what they add.
Lastly, if you wanted to follow SPACs news and see who is merging with who, SPAC Track is a good website to do so. You can filter based on the status of the process.
Clearly, more research is needed. In 2020 all I knew about SPACs is that they were a “new” way for companies to IPO. In 2021, I know all this. The year is still young and there is power to incremental progress.
If anyone has any other advice or resources they would recommend related to SPACs, I’m all ears.
This article is not investment advice. Always do your own research before making investments. All investments are a risk.