SPACs Were Hot in 2020 and Are Hotter Now. Here’s Why

Blank-check companies burst onto the financial stage in late 2019, becoming for more than a year the hot way to pull in money and make deals. Known as special purpose acquisition companies, or SPACs, they are shells that promise to buy another company with the money they attract. A record-breaking frenzy of more than 500 SPACs reeled in over $180 billion in the five quarters ended March 31. Some were backed by celebrities such as tennis champion Serena Williams and baseball star Alex Rodriguez while others were run by top financiers. Yet from February onward investors were starting to cool on SPACs as the U.S. Securities and Exchange Commission was raising red flags that investors weren’t being informed of potential risks. To some, SPACs are still a smarter way to get in on new businesses than traditional IPOs. To others, they’re a fad that indicates an overheated market for dealmakers.

SPACs raise money through an initial public offering (IPO) that includes the sale of shares and warrants (securities giving the owner the right to buy shares at a certain price within a specified time) in a bundled unit, typically priced at $10. While they aren’t supposed to pick a merger candidate until after the IPO, they typically identify one or more sectors to target. Investors assess the sponsors and dealmakers running the SPAC and give them a license to use the money as they see fit. SPACs usually have two years to complete an acquisition. If investors don’t like a purchase, they can sell their shares but keep the warrants. That still lets them profit if a deal goes well. Once the merger is completed, the acquisition target and the SPAC are a single public company.