By Tom Burnett CFA
On December 10, 2020, the SEC issued a special Investor Bulletin on the growing use of SPAC investment vehicles. A SPAC is defined as a “special purpose acquisition company” and it can undertake a public offering of stock even though it has no operations. In 2020, the incidence of SPAC offerings has produced a record level of financings. According to the website www.SPAC research.com, some 221 SPACs have raised $75.4 billion through early December this year. The website indicates that for all of 2019, there were just 59 offerings that raised only $13.6 billion.
The seven-page SEC document is an excellent primer for investors looking to understand this rapidly growing financial tool as it takes a look at the history of the SPAC market and spells out risks that investors need to analyze before investing. Many SPAC offerings involve warrants packaged with stock and these offering structures are explained in helpful detail. The Bulletin also points out that SPACs often trade at a premium to their offering price even though no operating assets have been merged or acquired. The Bulletin also defines and explains the “reverse merger” transactions which transform a SPAC into an operating company. Investors looking at a possible SPAC investment should take the time to review this informative document. The Bulletin can be found on the SEC.gov website in the Investor.gov section.
Tom Burnett CFA is Director of Research