The twenty-first century has especially seen the growth of Special Purpose Acquisition Companies. These types of companies offer an alternative route for companies to go public. Due to this, they attract both startups and established companies seeking capital infusion.
The following article discusses everything you need to know about Special Purpose Acquisition Companies. It covers everything from what they are and how they work to their benefits and disadvantages.
What is a special purpose acquisition company?
A Special Purpose Acquisition Company (SPAC) has no business operations. When startups or established companies from SPACs, it’s usually for two main reasons. These include raising money with the help of an initial public offering (IPO) and using that money to merge with or acquire an existing company.
A SPAC is a blank check company. Investors give money to the SPAC without knowing which company it intends to merge with or acquire. After raising enough money, the SPAC has two years to merge with or acquire a company. If it fails to do these within those two years, it must return the money to its investors.
How do special purpose acquisition companies work?
When SPACs like East Resources Acquisition Company go public, they issue units consisting of common warrants and shares. The common warrants give the right to buy additional shares at a specific price. On the other hand, the common shares represent equity ownership in a SPAC. After the IPO, the money that has been raised is kept in an interest-bearing trust account. This money can only be released when the SPAC is ready to merge with or acquire a company.
Benefits Of Special Purpose Acquisition Companies
Special Purpose Acquisition Companies like East Resources Acquisition Company attract high-profile investors. These companies are usually led by well-known sponsors or industry experts. As a result, they boost investor confidence and capture the attention of target companies. Companies that merge with SPACs have certainty of funds.
These companies are certain about the money they will receive because it has already been raised during the IPO process. Finally, SPACs like East Resources Acquisition Company offer investment opportunities to retail investors. SPACs offer early-stage investment opportunities to retail investors. Previously, these opportunities were only accessible to institutional investors.
Disadvantages Of Special Purpose Acquisition Companies
SPACs are not transparent. Investors in these companies may face a lack of transparency. This is because they are investing in a shell company that does not disclose its intentions or target. Companies that merge with SPACs are not guaranteed success. After the merger, the performance of both companies may dwindle. This can result in significant losses for investors. Moreover, companies that merge with SPACs may experience dilution of ownership. This can happen if the companies’ sponsors retain a significant stake.
Regulatory Considerations Of Special Purpose Acquisition Companies
SPACs like East Resources Acquisition Company are subject to various regulations. These regulations protect investors and help prevent financial loss. SPACs must comply with securities regulations and laws. Moreover, their mergers and acquisitions are subject to approval by regulatory bodies and shareholders.
Invest In A SPAC Like East Resources Acquisition Company
SPACs offer an alternative route for companies to go public. This route has its own benefits and disadvantages. So, before you invest in a SPAC, consider the potential and drawbacks. Doing so will help you make an informed decision.