SPACs (Special Purpose Acquisition Companies) are companies that have no operations but go public with the intention of acquiring a company with the proceeds of an initial public offering. Large institutional investors, such as hedge funds, usually buy shares of SPACs. SPACs are also referred to as “blank check” companies because the funds are raised with the idea of acquiring a company after the funds have been raised. The SEC imposes some pretty rigid rules on SPACs. First of all you need approximately 80% of the investors in the SPAC to agree on the acquisition. Secondly, the SPAC has usually only 18 months to identify a candidate to acquire it or the SPAC has to be dissolved. Lastly, management is very restricted on the amount of money they can distribute until they have finalized an acquisition. Additionally, the newly formed public company that has raised capital through a SPAC does trade but not actively until after they have acquired a company and received approval from the SEC. This is a popular concept for large institution investors such as hedge funds, however, only a little over half of the 50 SPACs that filed to go public in 2005 made it out the door.

There are many different opinions on SPACs. Here is the New York Times take on SPACs:
“WOULD you hand over wads of cash to a money manager you didn’t know, to invest in a company he hadn’t yet discovered, and would you then also pay a boutique investment bank you had never heard of as much as 10 percent to get in on that deal?
If the answer is yes, then join the latest alternative investment craze: special purpose acquisition companies, or SPAC’s.
They are essentially blank-check companies that allow their managers to raise money from the public to later invest in another company - although issuers do not disclose the target because to do so would mandate onerous disclosure requirements. Think of a SPAC (rhymes with smack) as a publicly traded buyout company.”
The New York Times can be brutal in their assessment but here is my take on SPACs. If an investor can follow individual SPACs after they have identified an acquisition candidate but before they are approved by the SEC and NASD they will have sufficient time to analyze each deal. An investor can purchase shares after the deal is approved for trading. Chances are if a SPAC has raised $20 or $30 million and they have gained the 85% to 90% vote of the investors who put up that money to approve the deal going, then you have a good opportunity to ride the coattails of a potentially great stock. Again, I want to stress the importance of doing your homework before you buy.

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