Special Purpose Acquisition Company the fast lane to an IPO

An IPO is a very big event in any company's life cycle and usually requires the company to perform extensive due diligence which leads to them hiring an investment bank. These banks in general charge a large commission for their services and also sell the stocks at a discount to ensure all the stocks get sold in the IPO. Therefore the company gets much less than its actual worth in the market and is forced to go through an extremely tedious and time consuming process. This is where the special purpose acquisition companies (SPACs) come in.

SPACs are usually formed by group of investors or sponsors with expertise in a particular industry with the intention of investing in it. These SPACs have no commercial operations and raise capital through an IPO solely to acquire with a preexisting company and to take it public. Normally SPACs do not reveal the name of the company that they intend to acquire during the IPO and hence the IPO investors are unaware of which company they are investing in and are rather betting on the sponsors (who are responsible for the acquisition) of the SPAC, because of this SPACs are often known as "blank check companies". SPACs have been around for decades but have really caught on in the last few years. SPACs raised a record $82 billion in 2020, a period sometimes referred to as the "blank check boom".

As the SPACs have no commercial operations their IPO process is much simpler. The money SPACs raise in an IPO is placed in an interest-bearing trust account which cannot be disbursed except to complete an acquisition or to pay the investors back if the SPAC is liquidated. After an acquisition, a SPAC is usually listed on one of the major stock exchanges. SPACs generally have two years to complete a deal or face liquidation, this would mean that the sponsors of the SPAC will not receive anything. This might incentivize them to buy a slightly less valuable company to avoid loosing out on their commission.

SPACs are a boon to small businesses, instead of trying to guess what the market sentiment is about them they can now negotiate with the SPACs and get to a mutually agreed evaluation of the company. Selling to a SPAC can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner.