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SPAC: Helpful Tips for Investors to Get Started

SPACs, or Special Purpose Acquisition Companies, have recently attracted a lot of interest from Wall Street, business boardrooms, and the media. 


SPACs provide an alternative to conventional IPOs, have been available for decades in various versions and have become quite popular in various countries, including Malaysia, among pre-IPO advisory and accounting services. 


Therefore, it is important for investors to be familiar with SPAC in order to make reliable decisions. 


Goals of SPACs

SPAC acquisitions of private companies are popular because they are  flexible and hassle-free than initial public offerings (IPO) for companies looking to go public.                            


The financial markets’ openness to new IPOs fluctuates according to the state of the economy and investors’ willingness to take on risk. A reverse merger enables a private company to go public after the IPO window has ended since a SPAC is already publicly traded.


Because their founders and other important shareholders may sell a larger proportion of their own shares via a reverse merger than they might with an initial public offering, SPAC purchases are also appealing to private companies. 


The lock-up periods for selling newly public shares that are necessary for initial public offerings may likewise be avoided by private company founders.


Working of SPACs

SPACs use initial public offerings to obtain money for acquisitions. A Class A common equity share and a warrant make up the conventional SPAC IPO structure. A warrant allows its owner to purchase more shares of stock at a predetermined price in the future.


There is a possibility to exercise the warrants and get more common stock shares when the acquisition target is found and the deal is completed. The warrant is split off and trades independently from the SPAC shares a few weeks after the IPO is finished.


The SPAC management team is looking for a suitable acquisition target after the IPO. Since the IPO funds are invested in government bonds, the SPAC stock should trade close to that price throughout this time; nevertheless, during market selloffs, SPAC stocks are susceptible to falling below the IPO price.


SPACs may also trade above their IPO price if investors think management will find a strong candidate for an acquisition. SPACs have a certain amount of time to choose an acquisition target and complete the transaction. Typically, the phase lasts for two years.


The funds in the escrow account are refunded to the shareholders if the SPAC sponsor is unable to consummate an acquisition within the allotted time frame. 


The SPAC sponsors will formally declare any possible target companies they find. The announcement date is the day when the general public is informed of the proposed purchase.


Risk Factors

Investing in SPACs is inherently hazardous since there is no assurance that the transaction will be successful. The risk is increased because SPAC acquisitions have less regulatory overhead than a traditional IPO. 


Even though they may be nothing more than educated estimates, SPAC owners are permitted to offer forecasts of future profits. It’s crucial to do your own study as a consequence.


Since you are essentially investing in several SPACs at once with SPAC ETFs, the risk is fairly spread out. 


However, you should still investigate how many SPACs the ETF owns, how evenly they are distributed among various industries, and the proportion of pre-deal SPACs to those that have already gone through the reverse merger process, because investing in SPACs prior to the merger has the potential to yield the highest returns.


It is important to consider all such risk factors when you are in the process of forming SPACs and going public with your company. 


Market Saturation

The SPAC market is crowded, there aren’t many good targets left, and performance is declining, according to some experts. In 2021, SPACs underperformed both conventional IPOs and the entire stock market. 


By the end of 2021, more than 60% of SPAC owners wanted their money back, prompting experts like Sonders to speculate that SPACs would no longer be a desirable investment.

Duties of Auditors in Malaysia-1

In Closing

It is obvious that stock investing involves risk, but investing in SPACs also adds a new degree of excitement. Of course, a greater risk often offers a greater return. 


All in all, as an investor, it’s important to do your homework, balance your portfolio, and educate yourself before investing in a SPAC stock or SPAC ETF. 

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