What is a SPAC?
A SPAC (Specific Purpose Acquisition Company) is a blank check company that seeks to publicly merge with a target company to create high growth returns for shareholders. While most private companies go IPO to raise capital, a SPAC is a group of investors who already have cash but haven't found the right business yet.
Churchill Capital Corp IV (NYSE: CCIV) is an example of a SPAC that seeks to merge with one of the most awaiting EV companies of the future, Lucid Motors. Management believes that Lucid Motors will give CCIV shareholders the best opportunity to grow their capital by combining the two companies to form a newly publicly traded stock to be listed as Lucid Motors.
How Do SPACs Work?
SPACs follow the same process from the initial listing on a public stock exchange to the final merger vote and target company listing. Here's a quick rundown of the entire process:
- A SPAC fills a prospectus with the SEC that details how the SPAC will issue shares/warrants and seek a target company to merge with.
- The SEC approves the public listing and the SPAC issues units that consist of 1 class A common share and 1/3 or 1/4 warrants of class A stock for future purchase at a 15% premium (usually around $11.50).
- The SPAC starts trading at $10 per share and investors can buy the class A common stock or the cheaper warrants if they believe the SPAC will trade above $11.50 in the future.
- The SPAC has 2 years to search for a target company or the funds will be returned to shareholders at $10 per share.
- Once a target company is found, the SPAC will issue a press release announcing the details of the merger along with a pro forma valuation of the target company post-merger.
- In order to complete the merger, the SPAC will allow shareholders to vote and the merger will be approved as long as at least 50% of shareholders vote in favor of.
- The SPAC merger is either approved or denied. If approved, the SPAC ticker will change to the target company's business name and ticker symbol.
- Most SPAC have a lockup period of 6 months after the merger that prevents insiders from dumping their shares on the market.
- After 6 months, the lockup period ends and insiders can sell their shares if they want.
- Finally, the company stock will trade just like any other stock unless there is another lockup period in the future (extremely rare).
Why are SPACs Getting so Popular?
SPACs help private companies go public much quicker than traditional IPOs and provide the target company with plenty of cash to fund growth and focus on reaching profitability. Since the SPAC is already listed on a public stock exchange, the target company will receive access to the public markets and be able to avoid the lengthy traditional IPO process that includes lots of SEC paperwork and a longer merger timeline.