If you’re not familiar with the thinking of many startup founders, the logic goes like this:
Sacrifice many months of your life (or years if you’re stubborn enough to build a fintech) to get your dream off of the ground.
If everything goes to plan, customers love your product, sharing it with their friends and peers.
Venture capitalists take note, and they give you lots of money to fuel your growth.
In exchange, they get some shares in hopes of a big pay-off down the road.
Then, after years of hard work, smart management, and a ton of luck, you, your fellow co-founders, and the other shareholders want to cash in.
You decide to go “public,” offering shares of your company on a stock market, in what we can an initial public offering (IPO).
In one fell swoop, you give everyone a quick and easy way to invest in your company while making you fabulously wealthy.
Living the dream, right?
But before you get to that glorious payday, you have a lot of work cut out for you.
Going public requires hiring an expensive law firm and a team of investment bankers.
With these experts, they scrutinize your every business decision, making sometimes painful changes to your operations.
Once satisfying these experts, the real challenge begins: convincing the market regulators that your finances are legit and your business model doesn’t pose a serious risk to investors.
Oh, and once all of that’s done, you can’t actually go public right away.
Instead, you need to “cool off” for a bit so that everyone can pick through your initial public offering documents with diligence.
If all of this gives you a headache, you’re not alone.
To alleviate this perceived pain point, some clever people got together and invented the “SPAC.”
What’s a SPAC
A SPAC is short for “Special Purpose Acquisition Company” and is sometimes called a “blank check company.”
Since that’s still cryptic, let’s break it down.
- Special purpose: i.e., there is a specific goal of the company instead of a broad mandate of ‘making money.’
- Acquisition: to acquire something by buying it. “Acquisition” would be the special purpose.
- Company: A legal entity that acts as a shell or holding company.
The special-purpose here is simple: raise a giant pile of money from investors (think hundreds of millions if not billions of dollars).
The company’s board then looks for a startup or other private firm that wants to go public.
Once everything is matched, the SPAC — which is already publicly traded on a stock market — acquires the startup and merges with it.
In turn, investors worldwide can buy the SPAC’s shares, investing in the newly merged company.
In a perfect world, the share price only goes up.
The founders of the company get their payday, and investors can grow their wealth.
In other words, a SPAC goes down the traditional IPO in reverse.
Unlike traditional businesses that grow and then go public, SPACs raise money first and then look for a company to bring to market (hence the “blank check” title).
As we mentioned above, going public is extraordinarily costly.
There are months if not years’ worth of preparation, involving a small army of lawyers, accountants, and auditors.
SPACs effectively bypass or simplify this process, making it attractive to both startups and institutional investors.
Why should I know about SPACs?
While SPACs have been around for a long time, their popularity has really taken off recently.
In fact, more SPACs were going public last year than there were traditional IPOs.
Some of the most popular ones brought to the public companies that
- make batteries and other electric mobility products
- provide satellite communications
- Sell kitchen-focused consumer goods in Latin America
- Process online payments
- Make it easy for Americans to bet on sports.
In addition to becoming the preferred investment channel for many companies, SPACs are becoming a status symbol of sorts.
Billionaires, celebrities, and even athletes are all opening their SPACs.
There’s talk that this alternative way to going public is yet another trend born out of the pandemic for the record.
However, investing is an ever-evolving trend, where the money goes to places that can grow the most efficiently.
SPACs, like crowdfunding and lending, represents another way companies can raise money and investors can grow their wealth. That constant means that SPACs are here to stay.
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What do SPACs mean for me as a person living abroad wanting to invest?
SPACs are just another way people can make an investment.
Since they are shares that trade on stock markets, investing in one is straightforward.
Whether you live abroad or not, you’d only need to purchase the shares through a broker.
For us who live overseas, we’d also need to consider special tax and management considerations as we move around the globe.
Of course, knowing which one to buy and making a data-driven investment decision isn’t always so clear.
While the “best strategy” is the one that works for you, diversification is a theme in almost every successful portfolio.
SPACs help makes investment more diverse, either through a fund or as an individual investment.
Index investing — still the gold standard for building an awesome and risk-protected portfolio — will also benefit.
Many index funds like ETFs invest in a broad range of companies based on specific rules.
With more companies going public via SPACs, the number of members in an index will also shift and grow.
For investors like you, more companies in an index mean more diversification, which’s always a good thing.