Ever heard of a SPAC? That’s the new trend floating around Wall Street. It stands for special purpose acquisition company and everyone from former Speaker of the House Paul Ryan to Shaq to the youngest self-made billionaire, Austin Russell, is getting involved with these. So what exactly is a SPAC?
In an IPO, you start off with a company that wants to go public which investors then pour money into. A SPAC turns that around by having investors pool all their money together first without an idea of what company they’re investing in. Then they take that money and search for companies to merge with. Because there’s a lot less paperwork involved and the company still winds up with the money and stock ticker, this is becoming a quick efficient way for investors to start making big bucks.
However, the idea of SPACs isn’t new. When these “blank check companies” first came about, the federal government cracked down on them because they were viewed as frauds. Since they often had no set plan, there was no surefire way for investors to tell where their money was going. In order to get around this, SPACS have added more safe guards to ensure investment security. For example, when someone invests in a SPAC, they can still get their money back if they don’t approve of the company that is selected. With this added security and shorter wait times, investors have dollar signs in their eyes. According to Sarah Morgan, a lawyer with the firm Vinson & Elkins, SPACs made up over 50% of her practice in 2020.
So why are SPACs becoming so popular in 2021? Reason being SPACs are faster than IPOs and are more concrete for founders. With the uncertainty that was 2020 for the business world, investors are looking for more of a sure thing and want to generate money quickly. SPACs are also good for the sponsors that close these deals, who are guaranteed a large pay day—so much so that it calls into question whether they are fast-tracking merges with mediocre companies just to get their compensation. Regardless of the reasons why, the upward trend of SPACs on Wall Street is proving that 2021 is looking different for startups and the stock market.
What do you think of the rise of SPACs? Let us know down in the comments.
This article originally published on GREY Journal.