Understanding the Recent SPAC Boom

Zoe Team

Apr 14, 2021

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

SPACs (Special Purpose Acquisition Companies) allow companies to go public faster by merging with a pre-existing shell company.
While popular, SPAC investments carry unique risks, including dilution and high levels of speculative volatility.
Investors should carefully research the sponsor’s track record and the target company’s fundamentals before jumping in.

Frequently Asked Questions

What exactly is a SPAC?

A Special Purpose Acquisition Company is a shell company created specifically to raise capital and acquire an existing private company to take it public.

Why are SPACs trending?

They offer a faster, often less regulated alternative to traditional IPOs, attracting significant attention from investors and celebrities.

Are SPACs risky?

Yes, they can be highly speculative and often involve significant price volatility compared to established public market investments.

What You Should Know About the Recent SPAC Boom

Like most people, you’re probably wondering why so many celebrities are suddenly jumping on the SPAC bandwagon.

If you have kept up with the news lately, you’ve probably noticed a trend around celebrities getting involved with SPACs. Athletes in particular seem to have a growing interest in SPACs, with A-Rod, Serena Williams, and Shaquille O’Neal all sitting on advisory boards of these new companies. Other notable names taking part in the SPAC boom are Jay-Z and Colin Kaepernick. Like most people, you’re probably wondering why so many celebrities are suddenly jumping on the SPAC bandwagon, and more importantly, what in the world is a SPAC?

What is a SPAC?

SPAC stands for special purpose acquisition company. It is a shell company, meaning it does not sell any products or services. It is set up exclusively for the purpose of acquiring private companies. SPACs raise money from investors through an IPO and use those funds to acquire a target company which will be made public through the acquisition or merger.

These companies begin by being sponsored by a team of investors, who are often Wall Street professionals. The SPAC then raises money from people that buy into the IPO, and the money is held in an escrow account until the SPAC’s management or board members find a target company that wants to go public through a merger or acquisition. Typically, board members have a time limit of two years to find and make a deal with a target company. If a deal is not made within the time limit, the SPAC undergoes liquidation, and the investors will be paid their money back.

Because the people buying into the IPO do not always know what the target acquisition company will be, SPACs are also known as “blank check companies.” After the SPAC acquires a target company, shareholders can choose to redeem their SPAC shares and receive their initial investment plus interest, or they can swap their shares for shares of the newly amalgamated entity.

Why Do Some Companies Prefer SPAC Mergers Over a Traditional IPO?

When private companies decide to go public, a traditional IPO can be a long, daunting process. The S-1 filing, for example, which is the preliminary filing document for an IPO limits the issuer to include solely historical and factual information about the existing business. Whereas, as an SPAC, the issuer can openly share his business plans and forward looking statements. Oftentimes, the red tape of an IPO can take close to a year to complete, significantly delaying the chance for a company to raise money by selling shares on the open market. However, a SPAC merger is a much quicker process, usually only taking a few months to complete because of the fewer requirements. Additionally, SPAC mergers and acquisitions have fewer costs than traditional IPOs, making them more appealing for small companies.

Why the Sudden SPAC Boom?

Special purpose acquisition companies are nothing new, as they have been around for many decades. However, they have become increasingly popular over the last year as markets hit all time highs in a zero interest rate enviroment. To get an idea of what the recent SPAC boom looks like, the below chart shows how SPAC IPOs have fluctuated over the past 15 years.

Many companies that were hoping to go public in the last year feared that the market’s volatility could ruin their efforts to raise new funds upon their public debut. The unpredictability of the market made SPAC mergers even more favorable for private companies. Because SPAC mergers are a much quicker process, companies could better gauge what the market would look like when they go public. This can beless risky for the company than waiting to complete an IPO and hoping the market is still in a good place.

Another factor leading to the rise in popularity of SPACs is the recent celebrity endorsements. While some celebrities have created their own SPACs to acquire companies that they believe in or support, that is not the case with every celebrity endorsed SPAC. Oftentimes, the celebrity endorsing the SPAC is not actually making the financial decisions, but instead is on the advisory board as a marketing tactic.

Jim Cramer of CNBC’s “Mad Money” has warned against SPACs being promoted by celebrities with no actual investing experience. The celebrities may just be using their status to attract new investors for their own financial gain. He warns any investors to conduct research on SPACs, their management team, and their track record before making any investment decisions.

How to Invest in a SPAC?

Because SPACs are publicly traded companies, you can invest in them the same way you would invest in any other stocks. And like all investments, it is important to do thorough research on which companies you choose to invest in to make sure they align with your financial goals.

Any type of investment has pros and cons, and SPACs are no different. Some SPACs have done extremely well on the open market, resulting in above average returns after acquiring a target company and going public. But this isn’t always the case. In fact, Renaissance Capital found that the average returns from SPAC mergers from 2015 to 2020 were lower than traditional IPO returns over the same period.

Final Thoughts

Regardless of what some think about SPACs and the new trend of celebrity involvement, SPACs have grown the last year and are expected to continue to grow. Goldman Sachs put this in perspective: predicting that SPACs could generate over $700 billion in acquisition activity over the next two years.

Before deciding to change your investing strategy or jump on this new investing trend, you should consult an experienced financial advisor to see if investing in a SPAC is right for your goals, time horizon, and financial situation.

What You Should Know About the Recent SPAC Boom

Like most people, you’re probably wondering why so many celebrities are suddenly jumping on the SPAC bandwagon.

What is a SPAC?

Why Do Some Companies Prefer SPAC Mergers Over a Traditional IPO?

Why the Sudden SPAC Boom?

How to Invest in a SPAC?

Final Thoughts

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017