I received an email from “Charles” asking how to find information on SPACs and perform due diligence. Finding out information or tracking SPACs is not an easy task to undertake because there are no formal reports that are issued covering these types of securities. Your best bet is to go to either the OTC Bulletin Board or Edgar Online and try to query information through key words such as “Specified Purpose Acquisition Company.” Information on SPACs is usually found under “IPO” filings. Also, DealFlow Media tracks activity of SPAC’s on a quarterly basis.

As far as due diligence is concerned, there is very little you can do in that department until the SPAC has acquired their merger candidate. The structure of a SPAC is usually very specific and they are structured to provide investor approval for any acquisition. Simply put, SPACs are investment vehicles that allow investors to invest in areas sought by private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of an initial public offering [IPO].

SPACs are usually formed for a specific industry but can also be used for companies that wish to go public but otherwise cannot. Some SPACs go public with a target industry in mind while others do not have preset criteria. With SPACs, investors are betting on management’s ability to succeed. The biggest risk for investors is if the management team of a SPAC buys into an industry where they have little or no expertise.

SPACs operate within a carefully structured investor protection framework. At least 80% of the funds collected are set aside in escrow for the acquisition and if no acquisition takes place within a specified time, typically 18 months, at least 80% of the funds invested in the shell company are to be returned to investors. If the SPAC is forced to liquidate its assets, the per-share liquidation will amount to about 80% of the original funds that were raised.

According to The Reverse Merger Report, since 2003 sponsors have launched IPOS for about 50 SPACs, raising about $3.33 billion. Approximately 50% of all SPACs find an acquisition and remain public.

SPACs usually trade in “Units” (stock plus warrants). SPACs that have not announced or completed a deal usually trade at a slight premium to the IPO price.

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