What is a SPAC? (Special Purpose Acquisition Companies Explained) - YouTube

SPACs are rising in popularity as a way for  companies to go public. But what is a SPAC and  

how does it work? SPAC stands for Special Purpose  Acquisition Company. These are also sometimes  

referred to as blank check companies or shell  companies. They are called blank check companies  

or shell companies because they do not actually  have any existing operations. These are companies  

that are formed with the sole purpose of acquiring  or buying another company. The whole goal of  

this SPAC or shell company is to actually raise  money in order to be able to buy another company  

and to be able to merge with it. So why would  people be willing to give a SPAC their money?  

It seems a little bit strange to want to invest in  a company that really has no existing operations,  

and it seems a little bit strange to  invest in something when you don't know  

what company they are wanting to acquiring.  Well there several reasons that SPACs are  

able to raise money. Typically they have reputable  sponsors and investors behind the SPAC that are  

kind of running the whole operation and looking  for those companies to acquire. And a lot of times  

these sponsors or investors are well known names,  people behind existing successful companies,  

or even celebrities. When you invest in a SPAC you  don't know which company they are actually trying  

to target and trying to acquire. So when you do  invest in a SPAC you are very much investing in  

the reputation of their team, their management,  their sponsors. So that is where those well known  

names come into play. So essentially the pitch  for a lot of these SPACs goes something like "Hi,  

I'm Bill Ackman. Give me money and I'll find  a unicorn." So then people who look up to Bill  

Ackman and potentially his investor friends or  people who have worked with him in the past may  

feel more inclined to actually invest in this  SPAC that he is behind because he has a certain  

reputation and certain knowledge within specific  industries. The money that was raised goes into  

this interest bearing account which is essentially  almost like an escrow account. They go out and  

they try to find a company that meets their set  of criteria. And until that company is found,  

that money does not leave that interest bearing  account. SPACs have to find and acquire a company  

within a certain timeframe - usually around  24 months. And if they are not able to find  

a company to acquire within that time, the money  in the SPAC is returned to its investors. There  

are definitely benefits for the sponsors as well.  They'll typically purchase founder shares which  

are essentially shares that are sold at a very  good price very early on, and this is essentially  

incentive for them to grow the company and for  them to continue to increase revenue because  

the larger stake that they have in this company  - the more shares that they have - the more that  

they're going to want it to grow because that just  means that they'll be able to make more money. So  

that can be a good or a bad thing, it really  just depends on how you view it and how much  

those sponsors are actually being incentivized.  To understand what you're actually getting when  

you buy a SPAC and why these are becoming so  popular, we need to first understand 3 of the  

main ways that a company can go public. These  would be an IPO or an initial public offering,  

a direct offering, or a SPAC. With an IPO,  which I will explain fully in a separate video,  

the process to actually go through this initial  public offering, get this company approved and  

through all of this process is very long, very  tedious, and very intense for the companies.  

With an existing company IPO's require a long  underwriting process. If you've ever tried to buy  

a house this is essentially the same thing as the  underwriting process that you go through to buy it  

where there are people who are checking all  of your financial statements, all of your past  

revenue, and pretty much anything that has to do  with the company, they're going to check. It's  

going to take a very long time. But in addition  to that, the underwriting process is also going to  

involve raising money from additional sponsors. It  usually requires a road show which is essentially  

going around and having to pitch this company and  promote it to potential investors. Once that is  

done, and once they have gone through that whole  long underwriting process of checking financials  

and assets, then the company can finally go  public. Most of the traditional IPO process  

is done through investment banks and there  are a lot of middle men and people in between  

as this process goes on. A direct public offering  is slightly less complicated than the traditional  

IPO process. Usually this is going to cut out  the middlemen from the picture so some of those  

investment banks and other people involved in  between. In a direct public offering it's the  

company directly selling securities to the public.  This is sometimes done if a company can't afford  

the underwriting process or if they just don't  want to deal with all of those middlemen.  

Slack is an example of a company that did a direct  public offering. Then we have SPACs. If a company  

is acquired by a SPAC, this is usually the fastest  route to going public. When a SPAC is formed,  

sometimes the sponsors behind the SPAC already  have a target company that they want to acquire,  

and other times they aren't clear on the  exact company that they want to acquire,  

but they have a certain list of criteria and in a  particular industry, and they just go for the best  

company that they can find. Now how it actually  works - that SPAC or that shell company that we  

talked about earlier is going to go public through  an IPO. Remember how we talked about IPO's having  

that long underwriting process? Well for a SPAC  that process is much quicker because they don't  

have a really long history or intense financial  statements because remember they're a shell  

company - they don't really have operations.  Okay so what do you get when you actually buy  

into a SPAC? With a SPAC you are typically going  to be buying in units. A unit is usually $10  

a piece and it will later split into common stock  and warrants. Common stock is just a regular share  

of a company, but a warrant actually allows you  to buy a share at a fixed price later on. When  

you buy a unit it isn't always going to be a  one-to-one ratio of common stock and warrants.  

So instead of getting one share of common stock  and one warrant, you may only get one warrant  

for every 5 shares that you have. There are  different ways that it's split up depending  

on the SPACs and depending on the companies, but  that is just something to be aware of. So assuming  

that the SPAC actually find a company - they are  then going to merge with the company and typically  

what will happen is the ticker symbol will change  - which is that series of letters that represents  

a stock on the stock market. Once regulations  are met and all of the paperwork is done,  

that merged company is now going to be public. All  that means is that it is then available to people  

like you and me to buy on the stock exchanges.  There are definitely still approval processes that  

they have to go through, but in general a SPAC  is going to go through much less scrutiny than a  

traditional IPO. That may be good for the company,  but unfortunately if not enough due diligence  

was done, some information can be overlooked  or ignored like we saw with the case of Nikola.  

SPACs can be beneficial for investors because  it can give you a chance to potentially get in  

early on a company before that company merges and  goes public. The warrants that you get with your  

units are kind of an incentive and almost like  a reward for investors getting in early on these  

SPACs. Because an investor has those warrants,  they have the option to purchase more shares  

below market value later on. If you choose not  to use the warrants and you just want to cash out  

instead you can do that as well. And that is one  of the ways that an early investor in a SPAC can  

kind of have an advantage over the general public.  If you want to learn more, be sure to subscribe  

to the channel for the next video on IPO's, or  if you're watching this a week after I post it,  

I will insert the video right here. You can  click on that and I will see you over there.