A special purpose acquisition company (SPAC) is a shell company without a specific business purpose. These companies are often referred to as “blank-check” companies since they’re in their development stages and don’t have any products or other offerings.
SPACs can provide potentially profitable investment opportunities, but they’re also highly speculative. Learn how to invest in SPACs, about the benefits and risks associated with SPACs, and how to decide if including them in your portfolio is right for you.
How To Invest in SPACs in 4 Steps
A SPAC, or special purpose acquisition company, is a publicly-traded company that has no specific business purpose, serving as a sort of shell company. Because SPACs are public, the process of investing in one is largely the same as investing in any other public company by buying stock. Below are the four simple steps required.
You might be wondering why you would invest in a company with no real business operations. However, many SPACs are formed with the sole intention of going public then merging with or acquiring a private company. This transaction is known as an “initial business combination.” It’s essentially a way for private companies to go public without going through the traditional initial public offering (IPO) process themselves. It gives them more certainty about pricing and deal terms than a traditional IPO would.
Open an Account
To buy stock into a SPAC, you’ll first need to have a brokerage account. You can easily open an account with one of the many online brokerage firms and investing apps on the market. You’ll just need to fill out a short application and fund your account by either depositing money or linking it to your bank account.
Decide Which SPAC To Invest In
When it comes to investing in a public company, you’d likely want to analyze the company’s financial statements and past market performance. But a SPAC is just a shell company, so it doesn’t have any business operations or other information to rely on.
When deciding which SPAC to invest in, look at the company’s prospectus filed with the U.S. Securities and Exchange Commission (SEC), and read any other publicly available information about the company. Some SPACs identify a particular company or industry they’ll seek to enter through their initial business combination in their prospectuses.
The EDGAR database holds information from domestic and foreign companies that file statements with the SEC. The information in this database is public, meaning anyone can access it. You can use the EDGAR database when researching SPACs you’re considering investing in.
Make Your First Transaction
Once you’ve opened your brokerage account and have decided which SPAC to invest in, the process for purchasing shares of a SPAC is fairly straightforward. Log into your account and search for the company either by its name or by its ticker symbol. Submit a buy order, indicating the number of shares you want to purchase.
Understand What Comes Next
What happens after you invest in a SPAC is a bit different than what you typically encounter after you invest in a typical public company. Once a SPAC goes public, it could be as long as two years before it completes an initial business combination to merge with or acquire an existing company. If you’re investing in a SPAC in the hopes of profiting off its future business ventures, then you’ll have to account for that time period.
What You Need To Know Before You Invest in SPACs
SPACs have become an increasingly popular way for private companies to go public. As a result, there are more opportunities than ever for investors to get involved. But investing in SPACs isn’t right for every investor.
Technically, anyone can invest in SPACs, because they are public companies. However, these investments are highly speculative. You’re essentially investing in a company before you know what its business plan or purpose will be and whether it will be profitable. As a result, SPACs are typically best left to experienced investors with higher risk tolerances.
Understand the Risks of Investing in SPACs
As mentioned, SPACs are speculative investments that have several risks you should be aware of. Here are just a few of the risks you’ll face when you invest in SPACs:
- Limited information: When you invest in a typical public company, you have plenty of information to help you decide if it’s the right investment for you. The company will have an established business model with past performance and financial statements you can review. But because SPACs have no business operations yet—and you don’t know for certain what their future business operations will be—the information is more limited. Less documentation is required for SPACs than for IPOs.
- Trading price: In most cases, a company’s IPO price is based on significant market research into the value of the company and what investors will pay. However, in the case of SPACs, shares are usually priced at $10 per share. While it’s not a high per-share price, it’s also not based on any real valuation of the business or its prospects.
- Time horizon: When you invest in a SPAC, it may be up to two years before the company completes its initial business combination with an existing private company. They are required to complete it within three years. During that time, you have the opportunity cost of the money you could have made in a different investment, and you’re mostly just waiting to see what will happen.
- Conflicts of interest: When SPAC sponsors make decisions about the initial business combination, they may be more concerned with their own interests than those of their investors. As a result, you can’t assume that future business moves will be favorable to you.
Pros and Cons of Investing in SPACs
Simpler IPO process
Potentially poor returns
- Affordable investment: SPAC shares generally trade for just $10 per share, which is cheaper than many major companies trade for, and cheaper than many IPO prices. So, the barrier to entry is fairly low.
- Simpler IPO process: Merging or being acquired by a SPAC is essentially a shortcut to going public. As a result, it’s become an increasingly popular path for private companies to enter the public market.
- Shareholder vote: As a shareholder in a SPAC, you’ll have the right to vote on the initial business decision. If you aren’t happy with the results of the vote, you can redeem your shares and receive your pro-rata share in the business.
- Increased risk: SPACs are speculative investments for several reasons. They offer less transparency, and you can’t be sure what the initial business combination will be—or even if there will be one. In addition, it may be a couple of years before the combination is complete.
- Potentially poor returns: Historical returns for SPACs haven’t actually been all that positive. Data from the Congressional Research Service, Harvard Law School, and Goldman Sachs indicate that SPAC shareholders can see negative returns and underperform traditional IPOs.
- Opportunity cost: Once you invest in a SPAC, it could be a year or more before the company completes its initial business combination. During that time, you may simply retain its value (or worse). Additionally, if the SPAC doesn’t complete an initial business combination within three years, you’ll simply return your pro-rata liquidated share of the company. But during that time, your money potentially could have been growing in a different investment.
What To Watch Out for After You Invest in SPACs
Again, it could be several years after you invest in a SPAC before you see returns. While many SPACs go public with a specific target company or industry in mind, there are no guarantees as to how long it takes before the SPAC completes an initial business combination.
Let’s review a few possible scenarios and their potential outcomes for investors.
If the SPAC Finds a Target Company
Ultimately, the goal of a SPAC is to find a target company to complete an initial business combination. The SPAC may share a prospective target company or industry in their prospectus, but they aren’t required to.
Once the SPAC finds a target company, shareholders will often have the opportunity to vote on the initial business combination. Once the target company is confirmed, shareholders can choose to either remain a shareholder or redeem their pro-rata share of the business.
If the SPAC Fails To Complete an Initial Business Combination
SPACs are required to complete their initial business combination within three years, although the duration often is shorter. However, if the SPAC doesn’t complete an initial business offering within three years, the company is liquidated, and each shareholder will receive their pro-rata share of the business.
If You Sell Your SPAC Shares
The tax rate you’ll pay depends on whether you had a short-term capital gain (from an investment you held less than one year) or a long-term capital gain (for an investment you held longer than one year). Capital gains may be offset by capital losses, helping to reduce your overall tax burden.
Should You Invest in SPACs?
SPACs have become especially prevalent in recent years, and they can be exciting investment opportunities. But they can also be difficult to understand and are considered high risk.
SPACs aren’t the right investment for everyone. If you’re a beginner investor or have a low risk tolerance, then SPACs likely aren’t right for your portfolio. However, if you’re an experienced investor and can tolerate a bit more risk, you might consider investing in SPACs. Just be sure to understand the risks.
Frequently Asked Questions (FAQs)
How can beginners invest in SPACs?
A SPAC is a publicly-traded company, meaning the process of investing in one is largely the same as investing in any other public company. That being said, these investments generally aren’t suitable for investors, given their increased risk and complicated nature.
Do I need a lot of money to invest in SPACs?
SPACs often trade at just $10 per share, making them accessible for most investors. The upfront cost will increase with the number of shares you buy, but you can get started for less money than you’d typically need for a traditional IPO.
What is the best way to invest in SPACs?
If you’re considering investing in SPACs, it’s important to do your research. Because there are no existing business operations or guarantees of future business operations, investing in a SPAC requires you to put your trust in the founder and management. Use the SPAC’s prospectus and other public information to learn more about the SPAC’s motives to decide if it’s the right fit for you.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.