SPAC: New "Bubble" or a Brilliant Tool in the Financial Investment Market?

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In recent years, SPAC companies have become a hot topic of discussion among experts in financial and investment circles.

What is a SPAC and why is this type of company unfamiliar to the general public of financiers and startup founders?

A SPAC (or Special-purpose acquisition company) is a company with a special acquisition purpose. How does a SPAC work? Simply put, it is a company already registered on a stock exchange, created exclusively for merging with or acquiring another business and taking it public, serving as an alternative to an Initial Public Offering (IPO).

If we look at how a SPAC works in more detail, we can highlight the following main points:

• Creation of a SPAC company by experienced investors or funds;
• Purchase of shares in the newly formed company (funds are frozen in special accounts);
• Search for attractive and potentially profitable firms for merging (the search period is up to 2 years, and if a suitable target is not found within this time, the funds are returned to the shareholders);
• Acquisition of the selected company.

Thanks to SPAC, other companies can go public within a few months, bypassing the lengthy and quite costly IPO process, which can take up to several years. Due to their specific capabilities, SPAC companies are also known as "blank check companies."

The most well-known company to have used this tool was Richard Branson's Virgin Galactic in 2019.

The popularity of such companies surged in 2020, when investments in more than 240 SPAC companies exceeded $83 billion. The following year, nearly 600 SPAC companies received investments amounting to over $162 billion. However, starting in 2022, due to economic crises and certain negative expectations among investors, investments in SPAC companies sharply declined.

In our opinion, this financial instrument will once again become quite popular among investors and promising startups after the stabilization of the global economy. It is the only opportunity for small private companies and startups to enter the global markets and become public companies, bypassing the rather complex IPO procedure.

Therefore, considering the current financial and innovative trends of the global market and the fact that any crisis stimulates further progressive development of technologies and new businesses, we anticipate that this financial investment tool will become quite popular among startups that achieve significant success.

What is the Future of SPAC in Ukraine? So far, it remains rather unclear, as we lag behind European countries and America in investment matters. However, the current economic crisis in Ukraine is pushing domestic businesses and startups to explore all possible avenues for development. It is quite possible that Ukrainian startups and businesses will not only learn about this instrument but also begin to actively use it.

Authots:

• Dmytro Maksymiv — Founder and CEO of Instacs;
• Tetiana Miroshnyk — Business Analyst;
• Oleksii Ulianovskyi — Writer.

References:

1. Excelsior Capital. What is a SPAC and Why are They Suddenly so Popular?
2. ey.com. SPACs: is the party over?
3. Bloomberg. Great SPAC Crash of 2022 Deepens as Investors Cash Out in Droves
4. investopedia. Special Purpose Acquisition Company (SPAC) Explained: Examples and Risks