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What is a Special Purpose Acquisition Company (SPAC)?
A Special Purpose Acquisition Company (SPAC) is a shell company that is created for the sole purpose of acquiring an existing company and taking it public.
Unlike traditional IPOs, blank check companies do not have an existing business, product or service. They are only formed to raise capital for the purpose of finding and acquiring an established company.
How Do SPACs Work?
SPACs are publicly-listed shell companies that are formed to acquire or merge with an existing company. They are also called blank-check companies.
A Special Purpose Acquisition Company has only two years to find and merge with an existing private company before it has to be liquidated. Blank check deals are primarily legal in the United States, where they are regulated by the Securities and Exchange Commission (SEC). They are also becoming quickly popular in Canada and the U.K.
Benefits of SPACs
A private company that chooses to go public with a SPAC deal rather than a regular IPO listing enjoys many benefits.
- The main advantage is that of time. A blank check deal only takes a few months to get approved and go public but a regular IPO may take anywhere between 6 months to a year.
- Another advantage is price. The private company being acquired by the shell company can negotiate for a premium purchase price.
- If the private company is being acquired by a Special Purpose Acquisition Company that was created by expert investors or management, it can enjoy the benefits of their expertise as well.
SPACs in the News
Silicon Valley Bank (SVB) recently crashed as a result of its customers trying to withdraw a total of $42 billion. A large part of these deposits was from SPAC deals and IPOs.
More than half of all startup deals in Silicon Valley in the last two years were banked with SVB!
SPACs in India
SPAC deals are not yet legal in India due to a number of regulatory and legal restrictions. However, the SEBI has stated in the past that it will be changing this framework to allow for these deals in India as well.
Allowing Special Purpose Acquisition Company deals for Indian startups would unlock up to $200 billion in the short to medium term. The Indian startup economy is booming, and flexible regulations would only further this success.
The Bottom Line
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What does SPAC mean?
SPAC, or Special Purpose Acquisition Company is a shell company created for the sole purpose of acquiring a private company and taking it public.
What is SPAC vs IPO?
While an IPO is a public offering of shares by an already established company, a SPAC is a blank check company created with the sole purpose of acquiring an existing company and taking it public.
Why is SPAC better than IPO?
SPAC deals go public a lot faster than IPOs, and also give private companies a host of other benefits, like market expertise, certainty of evaluation and greater flexibility.