Special Purpose Acquisition Company

SPACs and reverse (IPO) mergers

Source [Wikipedia]

An IPO through a SPAC is similar to a standard reverse merger. However, unlike standard reverse mergers, SPACs come with a “clean” public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place – except in the case where shareholders do not approve an acquisition, a built-in institutional investor base and an experienced management team. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies going public in standard reverse mergers.

SPACs typically raise more money than standard reverse mergers at the time of their IPO. The average SPAC IPO in 2018 raised approximately $234 million compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs can also raise money faster than private equity funds.  The liquidity of SPACs also attracts more investors, as they are offered in the open market.

SPACs risk factors seem to be lower than in standard reverse mergers. SPACs allow the targeted company’s management to continue running the business, sit on the board of directors and benefit from future growth or upside as the business continues to expand and grow, with a public company structure and its access to expansion capital. The management team members of the SPAC typically take seats on the board of directors and continue to add value to the firm as advisors or liaisons to the company’s investors. After the completion of a transaction, the SPAC usually retains the target company’s name and registers to trade under that name on the NASDAQ or the New York Stock Exchange.