Small and medium-sized enterprises have traditionally relied on banks as their principal source of capital. But Today's entrepreneurs are increasingly looking for alternatives. SPACs (Special Purpose Acquisition Companies) are one such option that has become a popular financing alternative for entrepreneurs wishing to purchase a firm from an existing owner. SPACs are meant as alternatives to traditional private equity, as they not only differ from other private equity solutions but also are supposed to be more adaptable, and accessible, and provide small-scale investors more ways to engage in the acquisition process than just buying shares. In layman's terms, a special purpose acquisition company (SPAC) is a firm with no commercial operations and is founded only for the purpose of raising funds through an initial public offering (IPO) or acquiring or merging with another company. Digital sports entertainment and gaming firm DraftKings, aerospace, and space travel company Virgin Galactic, energy storage innovator Quantum Scape, and real estate platform Opendoor Technologies are just a few of the well-known companies that have become publicly listed after merging with a SPAC. Though how does SPAC work? SPACs are often founded by investors or sponsors having experience in a specific industry or business sector in order to seek acquisitions in that sector. The founders of a SPAC may have at least one acquisition target in mind when forming the company, but they do not specify that target in order to avoid significant disclosures during the IPO process. This is why they're known as "blank check businesses." Investors in initial public offerings (IPOs) often have no prior knowledge of the firm in which they will be investing. Before selling shares to the general public, SPACs look for underwriters and institutional investors.
SPACs invest the money they raise in an IPO in an interest-bearing trust account. If the SPAC is liquidated, these funds can only be used to complete a purchase or to repay money to investors.
A SPAC usually has two years to execute a transaction before it is liquidated. In some situations, a portion of the trust's interest can be used to fund the SPAC's operations. A SPAC is normally listed on one of the main stock exchanges after it has been acquired.
SPACs provide a number of major benefits to companies that are considering going public. To begin with, a firm can go public through the SPAC method in as little as a few months, whereas the traditional IPO process might take anywhere from six months to more than a year.
The rise in popularity of SPACs in 2020 may be attributable in part to their shorter time frame for going public, as many companies opted out of traditional IPOs due to market volatility and uncertainty caused by the global pandemic. Second, because a SPAC has a limited time window for executing a deal, the target company's owners may be able to negotiate a higher price when selling to one.
Taking a company public through an initial public offering (IPO) is a lengthy process that requires complicated regulatory filings and months of negotiations with underwriters and regulators that's why to save time and money a company can take the SPAC way.
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