Okay so we can all admit 2020 was abnormal right?? Pandemic was and still is nuts. Stock market was at all time highs despite the economy going to crap. Also Bitcoin (and other cryptocurrencies) went crazy.
And then there were SPACs.
SPAC = special purpose acquisition company. Also known as a blank check company. They were invented in a the 1990s and served as another way to take a company public. They also were scandal ridden and fell out of favor quickly.
Prior to 2020, I had never heard of a SPAC. Then ridiculousness that was 2020 hit and they became all the rage. It seemed like everyone wanted to talk about them.
So last week, I decided to learn more about SPACs.
The purpose of a SPAC is to provide an additional way to take a private company public via merger without the traditional IPO process. Sounds great right? Well there are some downsides too and a Harvard Law article does a great job explaining them. The basics of the process are shown below:
However the devil is in the details. As with any traditional IPO process non-accredited investors typically cannot invest until the company is public. In most IPOs prior to the company going public majority of the money is made by the earliest investors. With SPACs there is a catch. Investors who contribute to the “blind pool of cash” are given their money back post-merger or dissolution of the SPAC and if the merger is successful they also get perks like a warrant.
This sounds to good to be true right?
Correct, because no investment is without risk. With a SPAC an investment is made in company prior to knowing what company you’re merging with. If you pick the wrong company it could prove disastrous as evidenced by the Nikola Motors ($NKLA) and its founder Trevor Milton.
And then there is the social media component. If you have a pulse and are an investor then you’ve heard of Chamath Palihapitiya (Twitter: @chamath). In 2020 he essentially became the Don King of SPAC IPOs. Matter of fact he promoted and launched three successful SPACs in 2020.
As evidenced above, 2020 proved to be a great year for Chamath. His Social Capital SPACs did amazing. However 2020 was an unusual year.
The pandemic created a perfect storm. With businesses losing revenue it became necessary to find other ways to stay afloat. As a result more companies went public than any other year.
SPACs were one subset of those IPOs and served as a great way to receive a much needed capital injection during the pandemic.
As a retail investor the game is played different. SPAC IPOs don’t follow the IPO process as we have grown accustomed to. These mergers tend to happen in the background of everything else going on. If you’re going to invest, please do your research or you’ll end up holding the bag like in the Nikola situation.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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