What is a SPAC Explained | Special Purpose Acquisition Company - YouTube

so picture this bill ackman billionaire hedge fund manager asks you to invest in his idea

you're a bit hesitant but hey it's bilakman so you want to know more about it so you ask

what's the idea to which he answers well you'll have to wait and see but it is very promising

that's sort of how sparks are and it's not just finance people that are involved it's

also athletes like serena williams rappers like jay-z and even politicians like paul

ryan what's up everyone it's kenji here and in this video i thought i'd explain what a

SPAC is so firstly we'll look at a definition of a SPAC and how it differs from a traditional

ipo secondly we'll look at why they've gotten so popular recently and lastly we'll go over

some of the concerns with SPAC so what is aspect and before we get into that i do need

to give you a bit of background so generally when a strong business is rapidly growing

there comes a point where they decide to raise a ton of money to continue with the growth

by going public basically that means that they sell their shares in the public markets

to investors so the stock market and in return they get cash for that now traditionally that

process is known as the ipo which stands for an initial public offering now this process

is both lengthy and expensive you need to hire an investment bank to help you need to

file a ton of paperwork for regulatory approval you need to pitch to investors in a road show

that you're going public so they get excited and want to buy your shares so give or take

that takes about one year of planning and another further six months for the actual

ipo process on top of that you need to pay the investment banks around 3.5 percent to

7 of the ipo proceeds not to mention all the legal accounting and other fees involved and

the management team has to go through this whole process while at the same time running

the business as they would usually so making sure the customers are happy all the stakeholders

are happy and so on and so forth so it's quite a headache for the management team so they're

all stressed out about this and that's when someone mentions spax as a way to bypass all

that red tape that goes into an ipo and here's how it works step one a famous person like

hedge fund manager bilakman and his management team known as the sponsors set up a shell

company or a spa meaning it's got nothing in it so no operation no business model no

employees nothing that's also why they're sometimes referred to as blank check companies

in that you're giving away your money blindly so step two the sponsor in this case bilakman

and his management team go out on a road show to try to get investors to put money in their

shell company that's got nothing in it but they do promise them that once we have this

money we'll invest it very wisely by acquiring a phenomenal business and all the investors

are like hmm why would i invest here so bill says well because it's me bill akhman i'm

not a billionaire for no reason my track record speaks for itself so the investors have faith

in him they say that they're interested in investing and bilakman goes ahead and files

for an ipo for that spock and the regulators are like whoa whoa hold on a second where

are you going so fast give us all your financials we need to order them so bill akman sends

them the financials but there's really nothing in it because well it's a shell company so

it had no previous operations so that whole process is super streamlined and it takes

about eight weeks because well there's just nothing to audit then once the spock ipos

and raises all the money that it needed bilakman needs to honor his side of the deal which

is to acquire a great private company now during that time that money is going to be

placed in a trust just in case something happens for security reasons and bilakman's going

to have a total of 24 months to find a company to acquire if that doesn't happen then he'll

need to return that money to all the investors so assuming bill acquan does find a company

to acquire and that acquisition is completed with no problems the publicly traded spock

then merges with the target company and becomes public in the process effectively replacing

the traditional ipo this process is also known as the sparking once the acquisition is announced

investors actually have a choice of either keeping their money invested because they

like the company that they've acquired or they can actually decide to liquidate so cash

out and get their money back in case they don't like the company that's been acquired

by the sponsor and there you go the private company that's been acquired has effectively

bypassed the whole traditional ipo process and is already trading in the market all right

now that we understand what a spark is let's look into why they've become so popular now

the funny thing about sparks is that they're not new they've been around since the 1990s

but they just had a bad reputation for scamming investors ever since the sec which is the

securities and exchange commission the main regulator in the us actually decided to step

in and regulate the market which is why in the past decade or so they've actually been

growing more and more and here's how their trajectory looks like there was hardly any

sparks in the early 2000s dropping down all the way to one spoke in 2009 but in 2020 it

began to really take off with 248 sparks and then 419 up until september 2021 and that's

actually more than the number of traditional ipos as for why they're so popular all of

a sudden to be honest nobody really knows the answer to that but the pandemic and it's

uncertainly certainly helped especially because in a traditional ipo it might take over a

year or two to actually get to trading in a stock market and by then maybe there's no

more interest in your company right on the other hand through a spark you're able to

bypass the whole process and you're able to go much faster then on the other hand there's

also the billionaire investors like what might be the case of chama palihapidia i think that's

how it's pronounced bilakman or richard branson also hopping on the ship now some of the most

renowned companies that have merged with sparks include quantum scape which creates batteries

for electric vehicles virgin orbit which launches satellites and draftkings a sports betting

operator however the biggest spark was led by bill aquin and it raised 4 billion dollars

but after some lawsuits it's still in the process of finding a company to acquire all

right let's look at some of the concerns that have been voiced with spax and when you invest

in a traditional company you can look through their business model you can see their financial

statements as that's publicly free information so you can see how much sales they've had

how much debt they're in their profits and so on and so forth but in the case of a spark

there is no such information all you really see is the famous person that's out there

trying to promote it that might be bilakman it might be or whoever else so you're really

betting on that person's ability and even though they may be remarkable people at the

end of the day it's still a blind investment another concern which was voiced by lloyd

blankfein who's the former ceo of goldman sachs is that the due diligence process is

nowhere near as rigorous as it is for a traditional ipo but where was the process and diligence

that we all associated with a rigorous ipo diligence process for example in 2019 adam

newman's wework was set for an ipo but ended up withdrawing after a growing investor concern

on the business model and its eccentric founder that was primarily due to the scrutiny of

investors looking to invest in the ipo but you fast forward to two years later and wework

is going public using a spark to bypass all that heavy due diligence process that i failed

two years prior and sure a lot has changed for wework in that two-year period whether

it be their management team or their business model but overall it's still something to

keep an eye out for oh and let's not forget about nikola the electric truck company that

went public via spock currently its founder who no longer works at the company by the

way is facing criminal charges for defrauding investors and among other things in nicola

you might remember the marketing campaign where the truck was going downhill because

it couldn't run under its own propulsion the very last concern is the incentive structure

how it usually works is the sponsor gets to buy a 20 stake called a promote at a heavy

discount usually regular shareholders pay 10 for a share but sponsors pay a nominal

price of less than 0.1 dollars for the same share it's essentially nothing that means

that if the spot raises 100 million the sponsor takes home 20.

so it's really in the sponsor's interest to find a deal as opposed to not finding anything

and having to return that money after two years when you think about it that means that

sometimes they can settle for acquiring a company that's less than ideal just to make

sure they get their big paycheck and even if that company does poorly it's still better

than having to return that money back to investors after two years having gotten nothing in return

overall as with anything else there's going to be some great players in sparks and some

very poor ones too so make sure you do your research that's all for this video if you'd

like me to explain something else in the future do let me know down in the comments and hit

that like hit that subscribe if you enjoyed it and i'll catch you in the next one