SPACs, or special purpose acquisition companies, have been around for several decades but have surged in popularity and activity over the last few years.
SPACs are shell companies that allow investors to raise funding through an IPO to acquire a privately held company. Also known as a blank check company, a SPAC then takes a company from privately held to publicly traded through a process that can be faster and more straightforward than a traditional IPO.
A SPAC doesn’t sell anything or make any products, so it has no commercial operation costs. It also generally has no debt, no liabilities, and almost no assets. SPACs aren’t held to the same scrutiny by underwriters as IPOs are, allowing them to move along the timeline in a streamlined way. While traditional IPOs can take years, a SPAC can go from formation to public trading within a few short months.
Typically, SPACs are first listed at $10 per unit. The money raised by SPACs waits in trust while the SPAC’s sponsor tries to find acquisition targets. This low per-share amount means that retail investors can redeem their shares with little to lose if they’re unhappy with the merger, though shares bought and sold on the secondary market can experience market volatility and may fall below the IPO price.
SPACs merge with a target company to allow the target company to go public while avoiding the traditional IPO process. From the point of acquisition, the company becomes known by the name of the acquired company. If no acquisition is made within two years, the money is returned to investors, though there can be extensions.
An investment worth considering
The SPAC space has gained rapid traction as an innovative means of investing. SPACs appeal because they offer faster fundraising as compared with private capital raising techniques.
SPAC investors typically get both shares and warrants. They have voting rights on business combinations and can also opt to redeem their shares. The funds raised by SPACs are held in a trust account or escrow until a potential business combination takes place.
Trends are evolving towards greater acceptance of SPACs, leading to an increased presence in the market with each passing year. There are SPACs for electric vehicles, fantasy sports, energy, health care, and more.
Take sports betting company DraftKings (DKNG) for example. It went public through a SPAC last spring and began trading with an expected market cap of over $3 billion. The success of DraftKings made it clear to many investors that SPACs can be a viable alternative to IPOs.
SPACs require less money to go public, as they spend far less on legal fees and financial consulting costs. And while IPOs involve a great deal of scrutiny into a company’s operations and liabilities, SPACs allow for more discretion and hold a company less legally liable for claims made about its future growth.
A slowing boom?
SPACs had shown signs of slowing down in recent months, primarily due to regulatory and legal concerns. The SEC has been cautious about SPACs, reminding investors that some of the SPAC boom stems from speculation. Investors don’t know ahead of time exactly what they’re putting their money into, so it’s vital to proceed into this arena wisely and with caution.
While there have been some ups and downs in 2021, investment in SPACs is more than just hype because reliable SPACs are led by experienced investors who have a keen understanding of a specific market or industry. Many SPACs are headed by known leaders such as Chamath Palihapitiya, Bill Ackman, and Michael Klein. Despite some fluctuation, Klein’s Churchill Capital Corp IV SPAC remains valued well above its original investment.
SPAC performance has continued to rise from year to year. Space tourism company Virgin Galactic Holdings also went public through a SPAC headed by Palihapitiya. Palihapitiya has said that the SPAC market “democratizes access to high-growth markets while dismantling the traditional capital market.”
There is still significant buzz surrounding SPACs. Some of the enthusiasm surrounds mergers involving large companies using the SPAC method to raise capital and go public. For instance, Gogoro, which sells electric vehicle batteries that can be swapped, plans to go public through a SPAC in the coming months. Gogoro (GGR) is valued at $2.35B. As founder Horace Luke explained, using a SPAC structure made sense for his company.
The next step for SPACs
While venture capital (VC) firms had initially stayed away from the SPAC trend, dozens of venture firms have since come on board. If specific guidelines are met, the SEC allows VCs to use SPAC money to buy one of their own portfolio companies.
More money has gone towards SPACs in 2021, thanks to the flexibility, transparency, and broad access SPACs offer. Screening measures on SPACs can address investor concerns by choosing SPACs that are larger and more liquid. If a SPAC has traded for at least 90 days, it’s considered less risky as well.
Some analysts had feared the SPAC market might be waning but bear in mind that this market is raising over a billion dollars each week. The SPAC space is hot, with SPAC ETFs providing an alternative way to gain exposure to the space without having to bet on any particular SPAC company’s success.
SPACs may have evolved, but they don’t appear to be going anywhere. SPACs are one of the primary routes companies use to go public, and they remain one of the most popular ways companies list on the stock market. Despite some bumps in the road, SPACs are still quite a robust market.
Important Disclosures:
The Fund’s investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read carefully before investing. A hard copy of the prospectuses can be requested by calling 833.333.9383.
Defiance Next Gen SPAC Derived ETF:
Investing involves risk. Principal loss is possible. As an ETF, SPAK (the “Fund) may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. The Fund is not actively managed and would not sell a security due to current or projected under performance unless that security is removed from the Index or is required upon a reconstitution of the Index. A portfolio concentrated in a single industry or country, may be subject to a higher degree of risk. The Fund is considered to be non-diversified, so it may invest more of its assets in the securities of a single issuer or a smaller number of issuers. Small and mid-cap companies are subject to greater and more unpredictable price changes than securities of large-cap companies.
The Fund invests in equity securities of SPACs, which raise assets to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. There is no guarantee that the SPACs in which the Fund invests will complete an acquisition or that any acquisitions that are completed will be profitable. Investors who purchase SPAC shares in the secondary market after an acquisition announcement may suffer a loss if the value of the shares subsequently declines. Because SPACs have no operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. The potential risk of SPAC managers who are inexperienced or unqualified can be made more pronounced by this lack of any operating history or past performance of the SPAC.
Public stockholders of SPACs may not be afforded a meaningful opportunity to vote on a proposed initial business combination because certain stockholders, including stockholders affiliated with the management of the SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction without support from public stockholders. As a result, a SPAC may complete a business combination even though a majority of its public stockholders do not support such a combination. Some SPACs may pursue acquisitions only within certain industries or regions, which may increase the volatility of their prices.
The Fund invests in companies that have recently completed an IPO or are derived from a SPAC. These companies may be unseasoned and lack a trading history, a track record of reporting to investors, and widely available research coverage. IPOs are thus often subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection with the IPO prior to inclusion in the Index. The price of stocks included in the Index may not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition, IPOs may share similar illiquidity risks of private equity and venture capital. The free float shares held by the public in an IPO are typically a small percentage of the market capitalization. The ownership of many IPOs often includes large holdings by venture capital and private equity investors who seek to sell their shares in the public market in the months following an IPO when shares restricted by lock-up are released, causing greater volatility and possible downward pressure during the time that locked-up shares are released.
SPAK is new with a limited operating history.
Read more about SPAK here, including performance and holdings: https://www.defianceetfs.com/spak/. Fund holdings are subject to change and should not be considered recommendations to buy or sell any security. DraftKings, and Virgin Galacti are currently held in the Fund; Churchill Capital Corp IV and Gogoro are not currently held in the Fund.
Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
Defiance ETFs are distributed by Foreside Fund Services, LLC