SPACs, the latest fad in fund-raising: Explained
This year has been tremendous for SPAC-ing. Let us simplify SPACs for you :)
This year has been tremendous for SPAC-ing. 133 companies have raised $51Bn (INR 3,82,500 crores) in the US using this route.
Take a look at how much has been raised using SPACs over the years:
Crazy growth, no?
So, what the hell is this SPAC?
SPAC = Special Purpose Acquisition Company.
Three questions come to mind when you read that full form again:
What is the “Special Purpose” they serve?
What or who do they “Acquire”?
Who makes or owns this “Company”?
Before answering these questions, let us delve a little into what’s this whole scene about fundraising.
Companies need money to run.
Start-ups that look to disrupt the world do not usually have proven business models or straight-jacket formulas to make money. To invest in them, you need someone as crazy as the founders; someone with deep pockets.
These people are called by a lot of names (depending on the stage at which they enter a company); angel investors, early-stage investors, venture capitalists or private equity firms. These are the crazy ones that support the dreams of other crazy ones.
Now, once a start-up succeeds, or successfully proves that it can succeed, it goes on to face the world on its own (“goes public”).
Plus, the investors who took a sleep-wrecking risk in these companies now expect to be rewarded.
So, the culmination of the dream-run of an intensively capital-fueled start-up comes with an Initial Public Offer - the first time a start-up asks the public to trust them with their money.
But, bringing out an IPO is not a cake-walk. Especially if you are in the United States of America.
The SEC (Securities Exchange Commission), a body that regulates capital markets in the US is a really tough, no bullshit kinda organisation. So, they need a lot of due diligence to be done before a company hits the Streets. This slows down the whole IPO process.
However, the start-up community has always been fueled by speed and are always on a different high. Anything going slow, and they look for a “quick-fix.”
Slow is no fun. So, to speed things up, they use an innovative product called “SPAC”.
The “Special Purpose” that SPAC serves is that it makes the IPO process much faster. How?
Steps:
Create a company with no business objective other than acquiring another company
Find a lot of high-risk-appetite, golf-playing, deep-pocketed investors
Launch an IPO for this “shell” company
Acquire a start-up of your choice (that’s within your budget)
But, an IPO process is required here too!
Yes. It is. But, what these smart investors do is register these companies well in advance (a SPAC need not acquire any company up to 2 years. Lots of time for the sharks to find their favourite meal).
Plus, they don’t need to declare the name of the company that they are going to acquire in the future.
Basically, they're pooling in money so that SOMEONE can find SOMETHING to invest in? Yep. It’s that crazy!
Guess SPAC can also be called “super-rich guys hunting in packs.”
Moreover, the compliance requirements for this is much lesser, the process much smoother - much more elegant. It saves a lot of time and effort for a start-up looking to get listed.
Also, there is only a single point-of-contact for the start-up to deal with (unlike a full-blown IPO where you have to talk to and convince 100s of big bankers and, of course, the public at large).
Once the SPAC acquires you, merges with you, your start-up is officially a publicly listed company. Just like that.
The best backdoor route to get listed, this is. Sach.
These SPACs have become all the fad (and a much talked about topic now in investor circles) because of companies like Virgin Galactic (a space-commerce start-up) taking this route, and celebrity investors like Bill Ackman acting as a SPAC sponsor, with a $4BN blank cheque to acquire a start-up.
It’s no big deal, honestly. The rich have just found a way of getting richer. Chill hai.
You stay safe, take care and, of course, ReadOn.
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