Why SPACs Are the New IPO
The traditional route to going public is too slow for companies that want to cash in on hype
Special purpose acquisition companies (or SPACs) have raised record amounts in the last few years. Some 28 SPACs have had IPOs this year, raising $8.9 billion, according to SPACData.com. At the current rate, that’s on pace to reach $16.5 billion by the end of the year, beating last year’s $13.6 billion and massively ahead of the 2011–2015 average of $1.7 billion.
SPACs have a simple model: raise funds from the public markets, then find a company to merge with. When they announce the merger, shareholders can either accept stock in the new company or redeem their shares at the original price of the offering. So, to the SPAC issuer and the company they merge with, the SPAC is a deconstructed IPO with a very short roadshow (in theory, you just negotiate with one investor — or with a few SPACs as you try to attract the highest bidder). To the SPAC investor, it’s a subpar money market fund with a Kinder Surprise Egg-style option attached: invest, and for the cost of tying up your capital for a while, you have the option to get… something.
