With the recent announcement of Buzzfeed going public as a SPAC, the spotlight is once again on special purpose acquisitions companies, or SPACs. Founder and CIO of ERShares Joel Shulman recently discussed the return of SPACs on Fox Business.
The SPAC Is Back?
A SPAC is in essence a shell company created by investors for the sole purpose of acquiring another company by raising funds through an IPO. They are typically created or sponsored by institutional investors or hedge fund and private equity managers.
Investors buy shares of the SPAC, and that money goes into trust accounts that accrue interest until a private company looking to go public through acquisition is found.
Historically, SPACs have not been as profitable as a traditional IPO, but that looks to be changing.
“SPACs are no longer a four letter word,” said Shulman, noting that SPACs are up 10.5% since May 10th’s bottom. “SPACs are coming back.”
A main component of SPACs that has changed recently are warrants, which give the investor a chance to purchase more stocks at a discounted price some set amount of time after the merger is completed. Warrants are issued as part of a SPAC unit where a stock and part, or all, of a warrant are bundled together. Partial warrants can be combined to make a full warrant.
“The reason that many of SPACs slowed down is … that in mid-April the SEC demanded that the warrants be treated as liabilities rather than equities. That created a log jam at the accounting firms and legal firms. That’s starting to free up a little bit,” Shulman explained.
SPACs Are Evolving
As more SPACs are being created, it is causing the terms to shift, with risk capital increasing substantially. “The change in risk capital means the terms and the rewards to the key investors has gone way down, by as much as 40-50%,” said Shulman.
It’s also taking less time for SPACs to acquire another company, falling from an industry standard of two years to a year and a half, and in some cases as little as 12 months, said Shulman. “That increases the risk to these SPAC…(to the) principles behind it.”
With less time to find a business to acquire, the risk of SPAC failure grows greater.
Investor demand for warrants are also changing. “Investors are now demanding instead of half a warrant in a new investment, they want a full warrant or maybe three-quarters of one. So the terms are changing,” said Shulman.
“It’s a dynamic market, very hot and SPACs are coming back,” he added.
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