Blank check companies. also known as special-purpose acquisition companies (SPAC) are all the rage these days.
Many believe that transitioning from private company to public through a SPAC transaction is easier and has other advantages than a traditional initial public offering (IPO).
SPACs allow for more control over deal terms and certainty surrounding pricing than IPOs. SPACs also have different rules around what financial disclosures a company must make. Thus, SPAC transactions have been growing in popularity recently with investors betting on these shell companies.
SPACs have already undergone their initial public offering and trade without any underlying business, just a pile of cash in an account waiting to be spent on a deal. Essentially traders are now investing into investors of a company before the blank check company actually decides on a business to invest in.
Purpose of SPACs
The whole idea of the special purpose acquisition company is to identify a business wants to go public and could benefit from an infusion of cash and the expertise of the SPAC's management. SPACs typically focus on a specific industry or cause that it is interested in investing in. For example some SPACs may be looking for new innovative automobile companies while another may be looking for a minority-owned tech start up. The possibilities are endless but once possibilities turn into a concrete deal, shareholders in the SPAC are often unsure of what to do next.
Warrants
First thing traders need to know is that SPAC IPOs usually give investors Units, instead of just shares. Each unit is comprised of a share and usually two warrants. Warrants are simply a contract that allows the investor to purchase additional shares of common stock at a predetermined price, which is frequently $11.50, compared to an IPO price of $10 for most SPACs. Thus, if a SPAC trades significantly higher, the investor may have the ability to buy more shares at a price lower than the then-current market price. In this aspect warrants act similar to call options.
Redemption
In addition to warrants, investors also have the ability to redeem their shares once the SPAC identifies the initial business combination. Essentially, once the SPAC finalizes a deal with another company, investors have the option to redeem their common stock for an amount that is usually very close to the IPO price. For traders who are less bullish on the partnership or just want to close their position, redemption offers a good opportunity to move assets away from the SPAC. However, the market price can often be higher than the redemption price in which case investors looking to close their position should likely simply sell their shares rather than redeeming them.
Holding Steady
On the other hand, if the investor likes the direction of the SPAC and is bullish on the new partnership, then they can simply remain a shareholder of the combined company. Investors are now betting on a company with a real underlying business and should do their due diligence in relation to prospective growth and valuations. At this point shareholders may also vote on the initial business transaction and hold many of the same abilities a typical shareholder would.
Some investors can be confused on what step to take next once a special purpose acquisition company finalizes a deal with another company. Once a deal is made, investors are offered a great opportunity to either close their position or invest in a company with a real underlying business that the SPAC identified as a profitable opportunity.
