Entrepreneurs dream of an initial public offering—commonly abbreviated as an “IPO” or “going public”—without realizing how many regulatory burdens and costs goes into the process. Enter the special purpose acquisition company, or SPAC for short. Investors place money into a shell company, the SPAC, with the goal of purchasing a private company, the target, and taking it public. To avoid the regulatory nightmare of a traditional IPO, the investors take the shell company public prior to acquiring the target company. At that stage, the shell company exists only to hold invested assets. After the SPAC goes public, it merges with the target company, pays its investors in newly public shares of stock, and evaporates.
Investing in any security requires accepting some risk. SPACs present an opportunity for investors to take even more risk in exchange for shell company equity that could explode in value. In a low rate environment that leaves investors looking for yield, many are willing to accept that risk. The chart above, pulling data from SPACInsider, shows the growing popularity of SPAC transactions. 2020 quadrupled the number of SPAC transactions from 2019. As of mid-April, 2021 has already seen 25% more SPAC transactions than all of 2020.
Major companies like Fisker and DraftKings have already gone public via SPAC. WeWork, SoFi, TalkSpace, and 23AndMe could join them this year. Eventually, the SPAC bubble may pop, but the enormous popularity of SPACs demonstrates the need for an easier, more efficient way of taking corporate securities public. If regulatory authorities will not provide one, they risk cutting innovative companies off from sources of capital or further legal improvisation to avoid overly burdensome regulations. In the aftermath of the pandemic, startup corporations need all the help they can get.
Cole Turner is a law student and researcher at Northwestern's Pritzker School of Law.
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