SPACs Are HOT, Here’s Why

Special Purpose Acquisition Companies

Startups are now more than ever taking their companies public through special purpose acquisition companies (“SPACs”). SPACs do not take part in commercial operations and are commonly known as “shell companies.” These companies are designed to raise enough money to discover a target company and secure a reverse merger. After funds are raised, the SPAC must complete an acquisition (via a reverse merger in which a public company, in this case, the SPAC, acquires a private company) within two years, or the money raised will go back to its investors. This system allows the private company to avoid the drawn-out and complicated process of going public autonomously.

Many companies are noticing and taking advantage of the benefits associated with selling to a SPAC. Compared to a typical private equity deal, a company sold to a SPAC may retain an increase in the sale price of up to 20%. Furthermore, companies may avoid the lengthy process of an initial public offering (“IPO”) if acquired by a SPAC. Essentially, SPACs offer business owners a faster IPO process with experienced partners and officers within the SPAC guiding the operation.

Spotify[1] and Slack[2] have both become increasingly opposed to following the conventional IPO route after learning of its myriad disadvantages: an expensive…