What Is A SPAC And How To Evaluate If It Is Worth Investing

IPO listings have been on a tear over the last year. Snowflake soared as high as 166% on opening day, while Airbnb opened at 115%.

With all the focus on the IPOs gains, Special Purpose Acquisition Company (SPACs) have largely flown under the average investor’s radar.

What Is A Special Purpose Acquisition Company (SPAC) A SPAC is a non-operating “shell” company created to raise capital to acquire an existing company. 

Many startups prefer to stay private since the traditional IPO process involves many burdensome regulations to raise funds.

Difference Between A SPAC vs. An IPO

The lack of hype enabling retail investors to allocate close to the NAV is the most significant advantage of a SPAC vs. an IPO.

The disadvantage with a SPAC is that you do not know which company merges with your SPAC.

How Does The SPAC Process Work Fundraising The SPAC process involves the sponsors raising capital from investors for buying an operating company. 

Creation Of Trust Account

Typically, SPAC IPO proceeds, after fees and expenses, are held in an interest-bearing trust account. These funds can only be used to complete an acquisition.

Although SPACs are supposed to invest the proceeds in relatively safe, interest-bearing instruments (usually Treasuries), it is better to validate by review the offering documents.

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