Special Purpose Acquisition Companies or SPACs are non-operating publicly-listed companies whose purpose is to identify and purchase a private company, allowing the acquisition target to have publicly listed stock. SPACs are also known as blank check companies. When a SPAC or other publicly-traded company purchases a private company, it is called a reverse merger. A traditional merger is when a private company takes a public company private. In 2020, 247 newly formed SPACs raised $83 billion in capital through initial public offerings. In 2019 and 2020, more SPACs were created in those two years than in the prior 18 years combined. SPACs raise capital to make an acquisition through an initial public offering. A successful SPAC acquisition can lead to a windfall for the SPAC sponsors because as part of the IPO they get to purchase up to 20% of the outstanding shares for a nominal amount of money. SPAC investing has been less profitable for individual investors. Most SPACs underperform the stock market and eventually fall below the IPO price. Given SPAC’s poor track record, most investors should be wary of investing in them.
1. NPR - The Spectacular Rise Of SPACs: The Backwards IPO That's Taking Over Wall Street
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2. Deloitte - Perspective: A primer on SPACs
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3. Investopedia - SPAC Terms
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