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A Special Purpose Acquisition Company (SPAC) is a type of company created for the sole purpose of acquiring or merging with other companies. SPACs are also known as “blank cheque companies” because they don’t provide any products or services of their own. They raise funds through an initial public offering (IPO) in order to acquire, or merge with other companies. Private companies choose to merge with or be acquired by SPACs as it allows them to go public, without having to execute an IPO of their own.
How do they work?
The money raised by the SPAC through an IPO is placed in an interest-bearing trust. This trust must be used to acquire or merge with another company within two years, or the funds have to be returned with interest to the investor.
Since SPACs don’t have products or provide services, their expertise lies in knowing which companies to buy and how to navigate the complicated process of issuing IPOs.
SPACs are formed by sponsors – investors with expertise in a particular industry or sector – looking to create a SPAC to acquire privately-held companies.
SPACs can help investors get in on the ground floor by allowing them to invest in companies as they go public. SPACs typically offer the following classes of securities:
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Shares: They are just like any stock share that can generally be purchased. In the SPAC world, they are called 'common shares' or 'commons'.
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Warrants: Warrants give the option to buy stock at a fixed price at a later date. The opportunity to exercise these warrants is what may be attractive with SPACs.
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Units: SPAC units are bundles of multiple securities. They are usually comprised of one share plus some portion of a warrant.
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Rights: They give the ability to purchase a fraction of a share. In order to buy a whole share, multiple rights are needed.
SPAC benefits and risks
SPACs can be beneficial for both the investors and the company that is being acquired. This is because the company being acquired can continue to focus on their core competencies, while leaving the heavy lifting associated with raising funds for an IPO to the SPAC company.
SPACs provide privately held companies with a number of benefits, compared to traditional IPOs.
SPACs often:
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Offer higher valuations
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Raise capital quickly
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Provide more transparency and certainty for investors
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Have lower fees
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Face fewer regulatory requirements
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Provide a refund with interest if no acquisition takes place within two years
However, there are a few things to consider before investing in SPACs:
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Your anticipated returns may be impacted by high acquisition costs
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The SPAC may dissolve if it cannot complete an acquisition within 18 to 24 months and use at least 80 percent of its net assets for any such acquisition.
While investing in SPACs has been limited to highly specialized hedge fund managers and other large institutional investment firms, they are becoming popular with individual investors.
Consider these SPAC choices
You can purchase:
- SPACS which are already listed on an exchange such as TSX, NASDAQ and NYSE.
- SPAC ETFs which are special exchange traded funds providing diversified exposure to SPACs. This will allow you to hold a collection of SPACs in your portfolio.
- SPAC IPOs that launch an IPO to raise funds and get listed on the stock exchange. As a TD Direct Investing client, you can view all new issues and upcoming IPOs (including SPACs) through the New Issues Centre. You may, however, need to meet a few eligibility requirements.
In recent times, high-profile SPACs have captured the interest of both institutional and retail investors. However, as SPACs tend to provide lower returns, there can be some hesitation around investing in them.
Investing in SPACs
As a self-directed investor, you have the option to invest in SPACs with TD Direct Investing.
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Once you've found a SPAC that you would like to invest in, open a TD Direct Investing account and log in to WebBroker.
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SPACs may have multiple ticker symbols, with each symbol representing a different class of security − shares, warrants, units, and rights.
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Use the search tool to locate your SPAC through its name or ticker symbol.
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Enter the number of shares you would like to buy and place your order.
Then simply wait for the SPAC to announce the target company it will be acquiring or merging with. Once the acquisition or merger is complete, you have the option to either stay invested or sell.
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