A Special Purpose Acquisition Company (SPAC) is formed by raising capital to take a private company public. They've been around for a while but have increased in popularity in recent years. So far in 2020, 91 SPACs have been formed and raised about $36.2 billion.
Some recent, well-known SPACs include Virgin Galactic (Nasdaq: SPCE), Nikola Motors (Nasdaq: NKLA) and DraftKings (Nasdaq: DKNG). Bill Ackman has also jumped on the SPAC-trend by raising $4 billion to take a "unicorn" company public. It launched on July 22 as Pershing Square Tontine Holdings in the OTC markets. There's also an ETF being launched, Defiance NextGen SPAC IPO ETF, in the coming weeks that will allow investors to gain exposure to this asset class.
How It Works
A SPAC starts as an initial public offering with no business operations that are typically formed by a group that has expertise in a certain area. It raises money by issuing shares. Then, it has two years to complete an acquisition, or it must return money to shareholders. They are known as "blank check" companies because investors don't know what the company will be investing in.
Acquired companies get to go public with fewer costs and hassles. However, there's less liquidity, and they often have to get backing from a large investor who can use that to acquire shares at a discount.
Going through the typ...