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For many startups, acquiring enough investor demand for an initial public offering (IPO) represents the pinnacle of success. Tapping into the stock market brings greater access to capital, thereby bolstering several growth initiatives. However, IPOs are incredibly expensive and time-consuming. To address these and other concerns, several up-and-coming enterprises look to go public via special purpose acquisition companies or SPACs.
Also known as blank-check companies, SPACs go public with the stipulation that they find a private merger target within a certain period. If found, the SPAC and the target merge to form a publicly-traded entity.
Top 10 Best SPACs Right Now
Perhaps the best overall reason to consider SPACs is that they provide investment opportunities you normally wouldn’t come across with blue-chip publicly-traded securities. Here are some of the most compelling examples to put on your watchlist.
Churchill Capital Corp IV: Confirmed to take electric-vehicle (EV) manufacturer Lucid Motors public, Churchill Capital Corp IV is compelling because Lucid offers the technical acumen and design credibility to take on the world’s best EV firms.
Apollo Strategic Growth Capital: Currently negotiating to bring Solera Holdings Inc. public, if successful, the combined entity would represent a play on risk management and asset protection software for the automotive and property insurance industries.
Colonnade Acquisition Corp: Announcing a merger with lidar sensor specialist Ouster, Colonnade Acquisition shares huge implications for autonomous driving and smart city applications.
Gores Holdings VI: Though shares of Gores Holdings VI have come down since announcing its merger with Mattersport, the target firm’s core business — a mobile app that can create 3D images of photographed buildings — offers tremendous relevance to the present real estate boon.
Starboard Value Acquisition Corp: Having secured a deal with Cyxtera, a global data center that offers affordable data storage solutions, Starboard Value Acquisition Corp shares jumped on the pertinent underlying business model.
Holicity Inc: Announcing a merger with orbital launch technologies specialist Astra, many investors have high hopes for Holicity shares due to the strong space research implications.
RedBall Acquisition: Currently seeking an acquisition target in the sports, media and data analytics sectors, RedBall Acquisition is intriguing as Americans have a strong interest and demand for live sports and entertainment.
Subversive Acquisition Units: Thanks to the backing of hip-hop star Jay-Z, Subversive Acquisition Units, which focuses on the cannabis industry, could attract many young investors.
Mission Advancement Corp: A SPAC that social justice activist Colin Kaepernick co-sponsors, Mission Advancement Corp seeks consumer firms that promote diversity-related issues.
Pershing Square Tontine Holdings: The offspring of hedge-fund manager Bill Ackman, Pershing Square Tontine seeks a mature unicorn with a value exceeding $1 billion. Ackman’s star power alone could spark continued interest in Pershing shares.
Features to Look for in SPACs
What makes SPACs appealing to both the merger target and prospective shareholders is that these blank-check firms offer a backdoor way to going public. That’s because the SPAC itself is a shell company with no operations. Its main value is that it’s a public entity and by merging with another company, the new combined entity becomes a publicly-traded firm.
As you might imagine, enterprises that go public via SPACs cut through the clutter associated with traditional IPOs. One of the biggest benefits of this backdoor route is that SPACs can shave time off the lengthy and rigorous IPO process, often by several months.
Remember the adage, though — there is no such thing as a free lunch. This is especially true on Wall Street. Although the concept is intriguing, you will want to know how to invest in SPACs the right way. Below are key features to look for:
Know your sponsor. SPACs are nothing without their sponsors, which is an individual or group of investors who form the blank-check company with the intention of merging with a startup of a particular industry. Therefore, the success of a SPAC ultimately merging with an enterprise rests on the sponsor wheeling and dealing underwriters and institutional investors. To maximize your own chances for profitability, you should research your sponsor and ensure that he/she has a track record of getting deals done.
Analyze the terms. Though investing in SPACs allows you to get in on the ground floor of a potentially exciting startup, you should know beforehand how the blank-check firm structures itself. Usually, the SPAC sponsor or management team receives 20% of the total shares outstanding following the IPO. Naturally, this dilutes your equity ownership allocation. Further, many SPAC IPO investors may own warrants, which give holders the right to buy more shares at a fixed price later on, thereby diluting the pool even more.
Understand the industry. While speculating on premerger SPACs means that you don’t know what target company the sponsor/management has in mind, you generally have an idea of what industry they’re targeting. Before placing a wager, make sure to understand the upside prospects and downside risks of that sector. You may also want to consider these 10 SPAC accounts to follow on Twitter for useful tips and ideas.
Best Online Brokers to Buy SPACs
You might think that SPACs represent a special breed of publicly traded investments and in the nuances, they are certainly that. The mechanics of buying SPAC stocks is identical to buying garden-variety securities.
The nuance, however, is that while major brokerages have no problems with retail investors acquiring equity of blank-check companies, some platforms may not allow you to enjoy the full breadth of services available for purchasing “regular” stocks.
For instance, some brokerages may not allow you to buy SPACs on margin for safety concerns. Before a merger announcement, SPACs are very speculative, depending mostly on the acumen, skill, even charm of their sponsors.
If you want the best service and access to SPAC investments, below is a list of brokers to consider.
Why are SPACs Popular
You’ll often come across several online resources marketing the “Top 10 Best SPACs to Buy” and that’s for a reason — this financial vehicle is incredibly popular, as the data on SPAC IPO count and gross proceeds demonstrates.
But what exactly attracts investors to this backdoor approach to the tried-and-true IPO? You can find key reasons listed below.
Speed and directness: Because SPACs have no operations of their own, when they go public (to seek a merger target), they don’t face extensive regulatory scrutiny. Thus, the SPAC/target-entity combo can go public quicker than a traditional IPO. And this direct approach appeals during this uncertainty over the pandemic.
Expanded opportunities: IPOs are expensive. As mentioned above, they can take time and no guarantee exists that at the end of the rigorous process, a company will go public. Therefore, lesser-known startups have a better shot at accessing the capital markets, which in turn appeals to investors.
Celebrity draw: SPACs allow investors to wager alongside power titans in business and finance. Also, many A-list celebrities across the entertainment landscape have put their star power behind the SPACs they support.
Benefits of SPACs
Despite their less-than-noble reputation as a platform to take public fraudulent schemes, many of today’s SPACs have helped positively bolster this image. Below are key benefits of this investment category.
Ground-floor opportunity: Typically, traditional IPOs limit their access to only the most well-heeled and well-connected investors. But with premerger announcement SPACs, anyone can invest before the potential big wave of buying activity comes in. As an example, here is a list of 10 SPACs trading under 11 for investors to consider in 2021.
Disruptive capacity: Thanks to the rise of consumer and industrial technologies, several available SPACs have true disruptive capabilities. From electric vehicles to artificial-intelligence-driven software developers, investors have more choices of where to put their money to work.
Evangelism: With the sidestepping of the many traditional IPO hurdles, smaller firms that the public may not have heard about can enjoy the limelight. This not only brings fresh opportunities to the table but SPACs essentially foster product and industry evangelism.
Cons of SPACs
While SPACs bring a new level of engagement to the investment markets, no such thing as a drawback-free platform exists. Here are just some of the pitfalls you should consider.
Misalignment of motive: Many if not most SPACs feature sponsor compensation structures that don’t necessarily benefit the retail investor. Primarily, sponsors receive financial benefits for getting a deal done and not necessarily for whether the deal is a good one.
Dilution central: Should a deal go through, SPAC sponsors typically receive 20% equity in the combined entity (though this is not always the case). Immediately, this poses a dilution problem as retail investors fight for the other 80%. However, early investors may also have access to warrants, which gives them the right to purchase more shares later at a predetermined price. This further dilutes equity, so run the math before wagering heavily on any SPAC.
Regulatory remorse: While many investors don’t like government agencies acting as an overly protective nanny, the reality is that the less-scrutinized SPAC may tempt bad actors into pushing to the public questionable schemes. With traditional IPOs, such shenanigans are less likely to occur.
An Early Bird Special with Some Risks
Thanks to its reverse-merger mechanism, SPACs garnered tremendous popularity recently. With its direct and quicker approach to going public, the process appealed to IPO-seeking enterprises that suffered disruption from the pandemic. However, SPACs are not without risks, particularly regarding sponsor compensation. Overall, SPACs open more opportunities for investors but you must do your homework before participating.
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