Comprehensive Overview of SPACs
What is a Special Purpose Acquisition Company (SPAC)?
Many companies have taken the route of SPAC for getting publicly listed on stock exchanges in countries such as US. They provide an alternative to floating an IPO. A SPAC is a shell company. It raises cash from the public through its IPO and gets listed. A private company that wants to get listed can merge with a listed SPAC. The cash that SPAC raised through its IPO is paid to the shareholders of the private company that is being acquired (or merged) by the SPAC. Once the private company gets merged with the SPAC it becomes a listed company. So, effectively, without floating an IPO, the private company has become a publicly listed one.
Current regulations in US require a SPAC to acquire or merge with another company within two years of getting listed as a shell company.
Advantages of SPAC
The advantage of the SPAC route is that private companies can get themselves listed quickly. The IPO process is a long drawn one. Companies have to go through the usual process of filing a prospectus with the securities regulator, such as SEBI in India or SEC in USA. The regulator takes some time to give approval for the IPO. Sometimes the approval may not be given if the regulator finds anything objectionable.
Once the approval is given, investment banks that act as lead managers and underwriters of the IPO do the marketing of the IPO. The fee that these investment banks charge for this is usually in the range of 1% - 3% of the IPO size. This effectively reduces the amount of money that the company floating the IPO raises for itself.
All the above costs and efforts are saved if a company goes public through the SPAC route.
An example of a company using the SPAC route to get itself quickly listed is Trump Media & Technology Group. The promoter of the company is former US President Donald Trump. In a legal case, a court in US ordered Mr. Trump to pay a penalty of $170 million. To raise this money, Mr. Trump decided to take his company public. So, his company merged with Digital World Acquisition Corp (DWAC). DWAC is a listed SPAC. Through this merger Trump Media & Technology Corp got quickly listed at Nasdaq.
Current regulations regarding SPACs in India
In India, SEBI has still not come out with regulations regarding listing of SPACs. But given the usefulness of SPACs and their rising popularity in countries like US, SEBI may allow listing of SPACs in India in future. It may make it easier and cheaper for Indian companies to get publicly listed.