SPAC, or a special purpose acquisition company, is a company that is formed to raise capital from an IPO or initial public offering.
These types of companies do not have any commercial operation. Special purpose acquisition companies are also known as blank cheque companies.
These companies have been in the market for decades but have gained popularity recently. Unlike other companies, a special purpose acquisition company does not have a set of targets or business operations to achieve.
The structure is based on trust units and shares in SPAC. The investors that invest in these companies can reach from celebrities, private equity funds, and the public.
Under 2 years, these companies should complete the acquisition of shares, or the funding is returned to investors.
Here's an overall guide about Special Purpose Acquisition Company in india (SPAC) explained by ESPECIA in detail.
What is Special Purpose Acquisition Company in India?
Special purpose acquisition companies or SPAC have become popular for investors and sponsors to take a company public.
These companies raise capital and shares through IPO or initial public offerings to acquire existing operating companies.
Subsequently, the company can merge with publicly listed SPAC to become a listed company due to executing its IPO.
Various advantages of these companies are discussed below on how these mergers work.
Some benefits of special purpose acquisition companies include a better approach over traditional IPO.
This is because the companies can have capital even though the market is in volatile condition.
These companies lower the transaction fees and the timeline before becoming a public company.
However, some risks and challenges can target the merger of Special Purpose Acquisition Company.
This can also include complex financial and accounting registration requirements based on the different operations of these companies involved.
The targeted company and its management team should be ready to act as a public company within a few months of signing the letter of intent.
Advantages of Special Purpose Acquisition Company in India
The companies that are planning to go public benefit from SPACs. The public offering using these companies can take a few months before going public.
With the help of an IPO, the company can go public within 6 months or 1 year.
In addition, the targeted company can also negotiate the price before selling its shares to SPACs.
Then negotiation can be done to commence the deal due to a limited timeline.
The targeted companies also benefited from enhanced market visibility as well as an experienced management team.
This is because prominent business executives and financiers sponsor them. The shares and investments can be made easily, even though the market is uncertain or volatile.
Working of Special Purpose Acquisition Company (SPAC)
Generally, Special Purpose Acquisition Company (SPAC) companies are formed by experienced sponsors and management teams.
The investment capital in these companies is nominal. For example, 20% interest is held by Special Purpose Acquisition Company, which is also known as shares.
The rest percentage of the interest is taken by public shareholders offered as units in the IPO.
Every unit consists of a fraction of common stock and a warrant. The voting rights of public shares, as well as founder shares, are generally similar. The founder shares the right to elect directors of SPACs.
The investors and sponsors that are a part of these companies generally have expertise in a particular business sector and particular industry.
It might be possible that the founders of a special-purpose acquisition company have an acquisition goal in their mind.
But they don't disclose these targets in the IPO process. These companies, also known as blank check companies, provide little information to IPO investors before investing.
Before the shares are offered to public, institutional investors as well as underwriters are acquired by these companies.
The funds that these companies raise during the IPO are kept in an account that can't be disbursed until the completion of the acquisition of funds.
The funds will be liquidated and returned to special purpose acquisition companies immediately if the acquisition is failed to complete.
The company has two years to complete the acquisition of shares, or it can face liquidation.
The companies are generally listed on a major stock exchange when the acquisition is completed.
The merger of Special Purpose Acquisition Company in India
After getting approval from a shareholder, SPAC prepares a proxy statement for a merger to take place.
Various matters are stated in these proxy statements to see the approval of shareholders.
The governor's and merger descriptions are also included in it. Financial information is also included in this of the target at a company.
These pieces of information can also include past financial statements and other statements that show the effect of the merger.
Once all the matters are cleared, and shareholders grant the approval, the deal is finalized, and the targeted company becomes a publicly listed or public entity.
Most people and investors cannot invest in privately held companies for specific reasons.
But investing in a special purpose acquisition company or SPAC is one of the best ways for public investors to partner with professionals.
Risk of SPACs
While special purpose acquisition companies have many benefits, they are also endangered by certain risks. These risks are given below:
- The returns from these companies can be lower and might not be able to meet the expectations that you expected. In other words, The returns can be lower than the ones that were offered during the deal.
- Unfulfilled deals are one of the greatest risks of these companies. Even if they identify a targeted company that they can acquire, the deal may not get through.
- The company can also be unable to find a significant acquisition target in a given timeline. If a private company cannot be identified by the management team of a special purpose acquisition company that completes the investment criteria, then the merger is impossible.
- Suppose market conditions are unfavourable, or the investors are not interested in investing or sponsoring special companies. In that case, the lack of capital can make it difficult for a merger to happen.
General SPAC timeline
Various factors, such as geography and business sector, determine the timeline of special-purpose acquisition companies.
When the shares are transferred to the trust account, and the procedure of IPO is completed, it generally takes 18 months or 24 months to complete a merger with the targeted private company.
If the merger is unsuccessful or completed within that given timeline, the funds or shares are returned to their specific public shareholder.
When a targeted company is identified, and the merger is finalized, the shareholders also have a right to vote against the fund transaction. They can also win the election to redeem their respective shares.
Conclusion
A special purpose acquisition company is a popular type of investment company that is specially created to raise capital with the help of an initial public offering or IPO.
These companies are also regarded as blank check companies. This is because they are formed while giving little information about investment without a specific acquisition goal.
Once they have raised a significant amount of capital or fund, these funds can be used to acquire a private company.
Rivers merger takes place through which the company is taken public and becomes a publicly listed company.
This way, the private company can raise capital and gain greater public market influence without getting complicated, as well as the traditional IPO process. The SPACs market has been becoming popular in recent years.
FAQs Related to Special Purpose Acquisition Company
1. Is there any special purpose for SPAC?
There are no specific targets or goals of special-purpose acquisition companies. These companies work without commercial operations and Management. These companies are strictly formed to raise capital and funds with the help of an initial public offering or IPO. This is done to merge or acquire any existing company in the business sector.
2. How does the acquisition of special purpose acquisition companies (SPAC) work?
Generally, these companies look for promising and targeted privately held companies so that they can invest in them. By the acquisition, the private company is traded publicly and listed as a public company on the stock exchange.
3. What happens if a special purpose acquisition company's merger is unsuccessful?
If these companies' mergers are unsuccessful in the given time frame to close the deal, then the funds are returned to their specific investors. A typical timeline for the merger to be complete is usually one or two years. The shares liquidate if the deal is unsuccessful.
4. How does SPAC make profits?
If the acquisition of the targeted company and the merger is successful, then the founders of SPAC benefits generally have 20% of the total stock. In addition, equity position is received by investors based on the contribution of their capital after a successful merger.
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