What Is a SPAC and Should You Invest In One?

What Is a SPAC and Should You Invest In One?

Suppose you are an investor or follow anything related to the stock market. In that case, you know how much attention SPAC’s are now getting from Wall Street. Special purpose acquisition (SPAC) companies are the hottest trend in the market. They have some of the most prominent investors involved. 

The trend doesn’t seem to be slowing down either. According to research from SPAC Analytics, there have been 346 SPAC IPO’s so far this year, accounting for nearly 70 percent of all initial public offerings (IPO’s) this year. 

If you are thinking of getting involved and investing in a SPAC, keep reading this comprehensive guide to learn more about the companies and if it’s right for you. 

What Is a SPAC

It stands for Special Purpose Acquisition Company and allows private companies to go public and offer shares to the public or retail crowd. 

The traditional process of taking private companies public generally involves an initial public offering or IPO where shares of the company are sold to the public. A SPAC, on the other hand, is regarded as a “blank check” or “shell” company meaning at the time they go public, they don’t have any real business attached to it.

The investors that created the SPAC will then look for an existing private business to buy and take public with the investor funds. 

Pros and Cons

Suppose you decide to invest in a Special Purpose Acquisition Company (SPAC). In that case, you should be aware of the benefits and disadvantages that come with it. 

Pros

One of the most significant advantages is gaining access to a previously private company. Several noteworthy businesses have recently gone public through a SPAC, including DraftKings, Virgin Galactic, and Purple Innovation. 

A big-name investor often sponsors a SPAC. One of the biggest names in the SPAC market is Chamath Palihapitiya, an executive at Facebook for several years and often referred to as the “SPAC King.” A few of his popular SPAC’s include Virgin Galactic, Opendoor Technologies, and Clover Health. 

SPAC’s give investors access to some of the most promising companies that can generate massive returns for investors over time. In addition, individuals that trade stocks are also interested in the SPAC trend as some of the most popular companies are going public this way.

Cons

Although some of these companies have made promising returns for investors, others have also lost money investing in SPAC’s. This makes it essential to do your due diligence still and know what you are investing in. 

SPAC’s are not required to report as much information as companies going public through a traditional IPO process. This can lead to deceptive practices like what happened with Nikola Motors, an electric vehicle startup. The company was accused of lying to investors, which led to a dramatic fall in the share price. 

Is Investing in a SPAC Right for You

Investing in a SPAC can be an excellent way to gain access to previously private companies. However, it’s important with any investment to do your due diligence and make sure what you are investing in is what it claims to be. If you decide to invest in a SPAC, try following the company closely to ensure its goals and objectives are met. 

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