What Is A Special Purpose Acquisition Company Or SPAC?
A Special Purpose Acquisition Company (SPAC) is a publicly traded company formed with the primary purpose of raising funds through an initial public offering (IPO) to acquire another company. SPACs are often referred to as “blank-check companies” because it has no commercial operations when it goes public. Instead, it seeks to identify and merge with a private company, effectively taking that company public.
A well-known example is the merger between Virgin Galactic and Social Capital Hedosophia, led by Chamath Palihapitiya. This deal brought Virgin Galactic, the space tourism company, into the public market.
What Is The Difference Between RTO And SPAC?
While both RTOs (Reverse Takeovers) and SPACs involve a private company going public, they differ in their approach. In an RTO, a private company acquires a publicly traded shell company to gain access to public markets. In contrast, SPACs are shell companies created for the specific purpose of acquiring a private company.
SPACs are typically funded through IPOs and explicitly state their intention to merge with a private entity in their offering documents while RTOs do not always make such intentions clear upfront.
Are SPACs Allowed In India?
The regulatory environment in India does not have provisions specifically tailored for SPACs, and the regulatory authorities may need to adapt or introduce new regulations to accommodate this financial vehicle.
How Are SPACs Helpful?
- Speed To Market: It can take a private company public faster than traditional IPOs.
- Access To Capital: Private companies can access capital markets more easily.
- Reduced Risk: It allow investors to know the exact terms of the acquisition upfront, reducing uncertainty.
- Mergers & Expertise: It sponsors often bring industry expertise and guidance to the private companies they acquire.
How Does It Works?
- SPAC Formation: A group of sponsors forms a shell company and raises capital through an IPO.
- Search For A Target: They have limited time to identify and acquire a private company.
- Merger Announcement: Once a target is identified, a merger agreement is announced and shareholders vote.
- Public Listing: Upon approval, the private company becomes publicly listed through the merger, and the SPAC transforms into an operating company.
- Trading As A Public Company: The combined entity begins trading on a stock exchange, giving investors a chance to buy shares in the newly public company.
