What Is a SPAC?

A Special-Purpose Acquisition Company (SPAC) is a publicly listed shell company that acquires a private company wanting to become publicly listed. For a private company wishing to go public, this can be an attractive alternative to a traditional Initial Public Offering (IPO). Going public via a SPAC is often considered a shortcut.

What Are the Benefits of a SPAC?

There are several reasons SPACs seem appealing to a private company looking to go public. The primary benefit is that a SPAC offers a quicker timeline and much less regulation than a company would face with a traditional IPO since the SPAC is already listed on a stock exchange. There are also typically lower fees than with a traditional IPO, and founders and major shareholders can often sell a greater portion of their ownership faster through a SPAC than they would be able to in a traditional IPO.

SPACs have been around for many years. After having just a single SPAC in 2009, the number of SPACs in the market rose steadily each year through the 2010s, then exploded in 2020 and 2021 with 248 and 613 SPACs, respectively. With increased market volatility and uncertainty following the COVID-19 pandemic, companies looking to raise capital by going public saw SPACs as a way to obtain capital more quickly and avoid a lengthy traditional IPO in an uncertain market.

What Are the Risks of a SPAC?

Since 2022, the number of SPACs per year has decreased as more investors see increased examples of failed SPACs and have recognized some of the problems these companies face. SPACs typically have 24 months to fulfill their purpose before investors receive their funds back. The SPAC is generally structured with incentives for sponsors and other participants if a transaction occurs before then. These incentives can lead to participants closing a transaction even if it is not in the best interest of other shareholders. With the process being less regulated, SPACs will also inherently have more risk than a traditional IPO.

2023 saw a spike of 21 bankruptcies from companies that had gone public through a SPAC. These companies spanned numerous industries and left investors with significant losses. WeWork, Lordstown Motors Corp., and Bird Global, Inc.’s investors were partially or wholly wiped out after going public through a SPAC. After living through this wave of bankruptcies, investors are likely to be much more cautious in years to come.

The Future of SPACs

The question remains, are SPACs still an attractive option for companies? In January, the SEC issued new rules about SPACs that become effective in July 2024. The SEC designed these new rules to protect shareholders and increase disclosure requirements about SPACs. Will these new regulations lead to a second boom for SPACs in years to come, or will they destroy the perceived advantages companies see in going public via a SPAC? Only time will tell.

If you’re involved in a commercial bankruptcy and have questions the Moore Colson Special Services team can help. Don’t hesitate to contact us for more information.

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Steven Jackson, CPA, CFE, is a Manager in Moore Colson’s Consulting Practice. Steven has 10 years of experience assisting companies with accounting and financial advice in forensic investigations and commercial disputes as well as providing financial and accounting analysis related to fraud investigations.

 

 

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