The boom in SPACS

Blankoscheckunternehmen sind bei Investoren eine beliebte Art des Geldverdienens an der Börse. Doch wie funktioniert das genau?

Imagine going to your bank with the following proposal: “I’d like to borrow a large sum of money for two years for a new project. But I can’t tell you exactly what I’ll be doing with the money because, well, I don’t know myself.”

How high do you think the probability would be that you’d be offered the funds you seek? Insignificantly higher than zero, I’d guess — even if the bank manager knows you very well.

Recently, however, there has been a craze on the stock markets — primarily in the US — of firms raising money for unspecified investment purposes. These firms are known as “special purpose acquisition companies” (SPACS). Because the details of their investment plans are unknown when they raise the money, SPACS are also known as “blank-cheque firms/vehicles”.

SPACS have become an increasingly popular alternative to the traditional initial public offering (IPO) as a way for firms to raise money and “go public” — that is, be listed on the stock exchange as a public company. Under a traditional IPO, a private company presents its business model and, with the help of an investment bank, offers shares to investors. Recent high-profile examples include the online travel-booking firm Airbnb in December 2020 or, more recently, the restaurant delivery firm Deliveroo.

The difference with SPACS is that the “sponsors” — wealthy individuals or institutional investors such as hedge funds — raise money for the SPAC via an IPO without a specific business plan. Instead, they intend to use the money raised — usually at $10 a share, with options (or “warrants”) for investors to acquire extra shares — to merge with a private company in the future.

In this way, that private company is taken public, but without all the bureaucracy of a normal IPO. The SPAC merger normally has to take place within two years of the original SPAC listing. If no suitable private company is found, the SPAC is liquidated, and the money raised is returned to investors.

SPAC mergers are seen as a faster way for private firms to go public than IPOS. They also provide more certainty about how much capital the private firm will raise. SPAC mergers are particularly popular with high-tech firms from Silicon Valley in areas such as electric vehicles, space travel or digital media. One famous example of a private company being taken public via a SPAC merger is Richard Branson’s Virgin Galactic in 2019.

Investors in SPACS are, in effect, signing blank cheques to the sponsors, saying: “Here’s my money. I trust you to invest it well.” That hasn’t, however, been what’s happened with all SPAC mergers to date. Your bank manager surely wouldn’t be surprised.