Special purpose acquisition companies (SPACs), which are also known as “blank check” companies, help businesses raise the money they need to go public. While SPACs have some similarities to traditional initial public offerings (IPOs), which are used for that purpose as well, they are very different.
A SPAC is a type of “shell company” that’s listed on a stock exchange. They’re owned by everyone from venture capitalists to star athletes and entertainers seeking to get behind smart entrepreneurs. Companies seeking to go public can partner with a SPAC to get investor dollars.
A SPAC owner can benefit financially by choosing a company with a solid business plan and a bright future. Tech, media and telecom companies are popular because they are considered to have a lot of room for growth and innovation. However, other types of companies can find shell companies anxious to partner with them to help them go public.
SPACs were “invented” over 30 years ago
Although SPACs have gained popularity in just the past few years, the idea actually originated back in 1993. SPACs were the brainchild of David Miller, our managing partner who heads up Graubard Miller’s Corporate and Securities group and a friend from New York University (NYU) Law School, David Nussbaum, who is an investment banker. The two were looking for a way to give private companies another way to get individual investors other than traditional initial public offerings (IPOs), which generally involve working with an investment bank that agrees to underwrite the IPO.
While it took SPACs nearly three decades to become widely used, today, they have a cumulative value in the billions of dollars. The sports betting company Draft Kings was among the first to use a SPAC. That led to much more interest in them.
Part of the hesitancy of investors to create SPACs is that shell companies had an association with nefarious financial activity such as dodging taxes. However, there’s nothing inherently illegal about them. They’re only illegal when they’re used to hide their true owners and/or to engage in illegal activity.
Safeguarding those who invest in SPACs
“The Davids” made sure safeguards were included in the regulations and disclosures around SPACs to prevent fraud. One of these allows investors in a SPAC to reclaim their investment before it merges with any private company looking to go public. Further, unlike with IPOs, companies seeking to partner with a SPAC are allowed to present financial projections to investors.
We discussed the various advantages and disadvantages of choosing a SPAC over an IPO in a previous post. Whatever your interest in SPACs is, it’s important to get experienced, knowledgeable guidance.