SPACs: 2020’s Most Popular Method of Going Public

The traditional IPO has largely been the domain of big, high-profile businesses that had obtained hundreds of millions in venture capital over a period of years. This year, however, traditional IPOs are overtaken by a method that’s existed for approximately 20 years but has gained traction just in the previous two.

Special purpose acquisition companies (SPACs), also known as blank check companies, have been busy since the 1990s. The U.S. Securities and Exchange Commission defines a blank check company as one which has no specific business plan or purpose. SPACs are shell companies without resources or a working history that raise money through an IPO with the aim to acquire or merge with an operating company. A SPAC doesn’t have to identify a possible acquisition target once it forms.

Shell companies were once considered not reputable due to the SEC’s finding they were mechanisms for fraud and market manipulation in the penny stock market. The SEC eventually adopted additional requirements for SPACs, including filing a conventional registration announcement before an IPO.

How It Works

SPACs are handled by business or private equity professionals. Recently formed SPACs are sponsored by a number of the greatest private equity companies in the U.S., and their IPOs are underwritten by top-tier investment banks. Hedge funds are the source of most SPAC investments.

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When a SPAC’s managers identify an attractive acquisition target, they present the company to the investors through proxy materials. The investors vote on the acquisition. SPAC investors’ share price is negotiated in advance of the IPO, whereas conventional IPOs are subject to market volatility. SPACs have up to 24 months to recognize a buy target, but they generally find one much more quickly. In the meantime, the capital is put in a trust account, which earns interest at market prices.

If a SPAC can’t acquire a business within the necessary timeframe, it has to return the cash raised to the investors. Before 2019, many SPACs failed to complete an acquisition and needed to dissolve.

Proponents of SPACS state this way of going public offers opportunities to companies that would otherwise be unable to access public markets.

A SPAC IPO is an attractive alternative for:

  • Smaller firms,
  • Fast-growing early-stage start-ups,
  • Businesses with minimal or no earnings,
  • Struggling older businesses.

As of October 28, a total of 165 SPAC IPOs have raised $61.3 billion in 2020, based on That is up from $13.6 billion increased in 59 prices in 2019. The average IPO size is $371.6 million thus far in 2020 compared with an average of $230.5 million in 2019.

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U.S. IPOs from SPACs ($ Millions)


Notable SPAC IPOs

  • Virgin Galactic. In October 2019, Virgin Galactic received over $450 million in earnings as it merged with SPAC Social Capital Hedosophia. The stock opened at $9.64 on October 28, 2019, and was trading at $17.51 on October 28 of this year though it gained only $238,000 in earnings in the first half of 2020 and had a net loss of $122.4 million.
  • DraftKings. This business runs fantasy sports games and allows people make legal wagers on sporting events. It united with SPAC Diamond Eagle Acquisition Corp. and went public on April 29, 2020, trading at $19.40. It was trading at $38.15 on October 28. Investors who purchased Diamond Eagle stocks on its IPO debut have quadrupled their investment.
  • Nikola. In June 2020, VectoIQ Acquisition, a SPAC headed by former General Motors execs, revealed that its shareholders voted to approve the purchase of hydrogen-powered electric truck startup Nikola Corporation, a business that doesn’t yet have a product. In September, Hindenburg Research published a report describing issues with Nikola technology, stating executives could be overstating battery capacities and accusing the company of fraud. Soon after that, Nikola founder and executive chairman Trevor Milton resigned, and the stock dropped.
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Ecommerce SPACs

Earlier this month, FinTech Acquisition Corp.. III acquired Paya and is currently Paya Holdings Inc., an integrated payments supplier.

Two weeks ago, Alter, an ecommerce platform for buying and selling used cars, and Insurance Acquisition Corp. (Nasdaq: INSU), a SPAC sponsored by Cohen & Company, an investment company, closed on their merger.

Online wholesale ecommerce vendor Boxed is allegedly considering going public by means of a merger with a SPAC.


A SPAC IPO is faster to complete and involves less red tape than a traditional IPO. But success isn’t assured. According to a Goldman Sachs analysis of 58 SPAC deals since January 2018, the ordinary SPAC underperformed the S&P 500 and the Russell 2000 three, six, and 12 months following a merger.

Evidence exists that SPACS could be losing some steam. By way of instance, Cerberus Telecom Acquisition Corp. is currently seeking to raise $300 million, selling 30 million shares at $10 apiece, while before it was attempting to sell 40 million shares at $10 apiece. Spartacus Acquisition Corp. and ArcLight Clean Transition Corp. also had to downsize their IPOs earlier this season.

As longer-term results from SPAC IPOs appear next year, the marketplace will decide if this way of going public is appropriate for businesses and beneficial for investors.

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