From Your Multimillion-Dollar Exit, by Wayne Zell
As an alternative to the traditional IPO (initial public offering), one of the more creative techniques that has gained increasing popularity in recent years is the utilization of the special purpose acquisition company (SPAC). A SPAC is a company that has no commercial operations and is formed strictly to raise capital through an IPO to acquire or merge with an existing, privately owned operating company for a specific purpose or in a specific industry.
In 2020, 247 SPACs were created with $80 billion invested, and in 2021, there were a record 613 SPAC IPOs. By comparison, only 59 SPACs came to market in 2019.
SPACs have very specific rules regarding:
how they can raise the money
when they must deploy the money (i.e., generally within two years after the capital raise)
what happens if they do not deploy the money in the way that they promised within the required time period (i.e., they must return the money to investors).
In the wake of increasing inflation and stock market volatility in 2022, SPAC offerings have declined precipitously.
The numbers behind SPACs are mind-boggling. You typically see the sponsor (i.e., the pre-IPO SPAC investor) trying to raise at least $250 million in capital, of which $6–$8 million is invested to cover administrative costs that include underwriting, attorney, and due diligence fees. With the structure and concept in place, the SPAC then sells millions of shares to investors at a set price. Before offering the shares to the public, the sponsor purchases about 20 percent of the shares at a steep discount from the public offering price. If the sponsors succeed in executing a merger with an operating target company within two years, their founders’ shares become vested at the higher public offering price, potentially making the sponsors a fortune.
If your business is big enough to attract a SPAC, you may want to seek this alternative exit strategy.