A Spec on SPACs, for Professional Traders

By: Montana Timpson

As the 2020 SPAC frenzy rolls into 2021, momentum’s holding strong, with a number of high-profile investors and companies continuing to raise record-breaking funds. SPACs outpaced even traditional initial public offerings (IPOs) last year, raising more than US$83 billion, to IPOs’ US$67 billion.

With an impressive 462% year-over-year jump, SPACs’ accrued proceeds are something of a market maelstrom — to help break down the SPAC frenzy, we’re taking a look at the increase in SPACs, their remarkable gains and how they differ from traditional IPOs. Here’s what professional traders need to know.

A special purpose acquisition company, or a “SPAC,” is a company with no commercial operations, formed strictly to raise capital through an IPO for the purpose of acquiring an existing company.

SPACs are often referred to as “blank-check companies,” because in creating a SPAC, founders opt out of identifying acquisition targets to avoid extensive disclosures during the IPO process. This leaves IPO investors in the dark as to which company they are ultimately investing in, but SPACs are generally formed by investors or sponsors with expertise in a particular industry or business sector, with the intention of pursuing deals in that area.

SPACs are often funded by institutional investors, underwriters and public shareholders. The money SPACs raise in an IPO is placed in an interest-bearing trust account and cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. Generally speaking, a SPAC usually has about two years to complete a deal, or the fund faces liquidation. Following an acquisition, SPACs are often listed on one of the major stock exchanges.

SPACs in the News
Though the 2020 SPAC frenzy drew a whirlwind of media attention, SPAC IPO fundraising has seen strong growth for a number of years. In 2019, SPAC fundraising hit US$13.6 billion — more than four times what was raised in 2016.

Part of the frenzy stems from big name investors backing SPAC funding, from celebrity figures like Alex Rodriguez and Colin Kaepernick to esteemed banking giants like Goldman Sachs and Deutsche Bank. However, the numbers virtually speak for themselves, with 145 SPACs showing a combined US$46.2 billion raised in 2021 alone, to date.*

Back in October, we tracked the SPAC rally and made note of temporarily dampening sentiment among investors following the summer’s boom — needless to say, SPAC momentum has found itself riding its summer rally once more, continuing strong as 2021 ticks on.

For more professional trading insights, guides and resources, visit Lightspeed’s Active Trading Blog and register now for our next live webinar.

*Data as of Feb. 16, 2021.

The author does not own any SPACs or recent IPOs mentioned in the article.

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