What is SPAC?
SPAC is known as Special Purpose Acquisition Company which is a public listing company with no operating business. It usually consists of a Management team, a Sponsor and a group of small public investors.
At the very beginning, the management team, who are the financial expert, private equity fund managers or famous CEO, generate any investment idea, create a shell company and sell to the public. The more reputation the manager has, the better the roadshow story is, the more money will go after his idea. In Jun 2020, a U.S. Hedge Fund Manager, Bill Ackman, had raised the largest SPAC offer, U$4 billion. Investors believed in his investment ability and his track record, hoping the share price of his SPAC to rise in the future.
Moreover, Anthony Leung, the former Financial Secretary of Hong Kong, had raised U$200 million through SPAC with the investment idea of healthcare technology in China in 2018.
Sometimes an entrepreneur of a start-up company is the Sponsor. Sometimes few private investors buy in an interesting idea from Management, becoming the Sponsors. Otherwise, the Management team, who funds themselves at an early stage, is the sponsor too.
The Process of SPAC Listing
The process of listing a SPAC is much easier than a traditional IPO because it is only a shell company without commercial operation or financial history. The SEC needs to take only 3 to 4 months to review. Besides, SPAC requires little preparation work, small administration costs and only one underwriter anyway.
With the approval from the SEC and the Sponsors, SPAC will allocate 20% of total shares which is known as ‘founder shares’ to sponsors, sell the remaining 80% to public investors at U$10 per share in a stock exchange. Normally, warrants will be given to shareholders to gain their long-term investment commitment.
Written by Ms. Florence Ip