The Specs on SPACs – And Why Blank-Check Firms Get Backing

As U.S. stock-market indices make new highs, an acronym that’s perhaps less familiar to investors — “SPAC” — is gaining traction. It represents a different way to invest, and perhaps log significant gains.

Shorthand for “special purpose acquisition companies,” SPACs are also known as “blank-check” acquisition funds. They’re development-stage shell companies that don’t have business plans of their own but instead merge with private companies that do.

For private firms, merging with a SPAC is a way to go public without having to go through the administrative hoops of a U.S. Securities and Exchange Commission filing. The blank-check firms have already done that, staging initial public offerings to raise money that they use to buy up promising privately held companies.

Luminary investors who’ve recently raised or announced plans to raise money via SPACs include billionaire Bill Ackman, former U.S. House Speaker Paul Ryan (the 2012 GOP vice-presidential candidate) and former Trump adviser Gary Cohn (also formerly of Goldman Sachs). For instance, Cohn recently made headlines by looking to raise $600 million through a blank-check IPO.

Meanwhile, private companies that have merged with SPACs include sports-gambling giant DraftKings and billionaire Richard Branson’s spaceflight start-up Virgin Galactic. And in the payments and financial sectors, Paya recently filed to merge with FinTech Acquisition Corp. III as a path to go public.

Elsewhere, Betsy Cohen, who founded and formerly operated The Bancorp, was reported this week as planning to take a $750 million SPAC public to focus on acquiring FinTech firms. Platforms are also part of the act, as Airbnb recently said it had been approached about merging with a blank-check firm.

To get a sense of just how much investor interest these vehicles are getting, SPAC Research has estimated that there have been 79 SPAC IPOs issued in the United States, which raised $32.1 billion. That beats the 59 such IPOs that raised $13.6 billion in 2019. And need we remind you, 2020 isn’t over yet, and it’s been the year of the pandemic.

Bill Haddad, partner with the corporate practice of Venable LLP told CNN recently that “the gene pool for SPACs has gone up because there are stronger companies doing these deals. There is a better track record and history and more credible, high-value targets.”

It’s interesting to note that the basic premise of these initial public offerings is the same as any IPO — investors fronting the capital expect to see gains down the line.

The SPACs themselves have a specific timeframe by which to find a firm to acquire. If a firm hasn’t done so within 24 months, the entity must typically dissolve and return funds to shareholders. Shareholders must also vote on whether to accept any proposed acquisition.

Of course, blank-check firms don’t have any operating history for investors to judge. But investors who buy shares are implicitly approving of SPAC management teams that they assume will make savvy acquisitions.

However, as promising private companies’ valuations head higher, deal-making can become harder (and less lucrative). So, as the Latin phrase tells us in all things financial: “caveat emptor — buyer beware.”