An Introduction to SPACs
One of the newest assets to hit the investment markets is known as a SPAC, or Special Purpose Acquisition Company. SPACs are generating excitement both amongst regular investors, as well as those using Self Directed IRAs. Let’s take a dive into the world of SPACs and get educated about this unique asset.
SPACs – The Basics
A SPAC is colloquially known as a “blank check company”. It is a company registered with the SEC and listed on the stock exchange. Its purpose is to raise funds through an IPO-like process and then use those funds to purchase a pre-existing company. The SPAC itself doesn’t have any business operations. It’s purely a fund-raising funnel until the target company is acquired. (It is during this fundraising when a Self Directed IRA would look at investing in the SPAC.) Then, once the target company is acquired, the SPAC will take it public.
SPACs and Target Companies
Why would a company want to be acquired by a SPAC and not go through a more traditional IPO process? Or, from a Self Directed IRA perspective, does the involvement of a SPAC tell an investor anything significant about the investment itself? The answer is not really. A company may choose to go public with a SPAC not because of any inherent problems within the company, but rather because the process can be much simpler. A company utilizing a SPAC can expect a faster process, a less grueling review from the SEC, and possibly a higher price for the acquisition. Even more importantly, the SPAC provides a certain level of stability for the company’s transition to the public domain. In a standard IPO a company’s share price can vacillate heavily based on public opinion, which is not the case with the set offer of the SPAC.
Are SPACs a Good Self Directed IRA Investment?
Like most investments, there is a correlation between risk and reward. Investors walk into a SPAC blind, often without even knowing which company is slated for acquisition. For the most part they are putting their faith in the fund’s managers who are often well-known financial figures or a management team that has been successful in a specific niche. The experience is there and the managers will do what they can to make it work. However, there are often negative incentives as well. Any time funding is based on “other people’s money”, there may be a more carefree attitude towards risk and growth. Additionally, a SPAC has a two-year deadline to find and acquire a company. The rush to put the money to good use can sometimes force a less-than-optimal business deal. The limited research that has been done on SPACs show that while a few show great returns, the majority underperform in comparison to standard market IPOs.
Self Directed IRAs and SPACs
The final decision about whether to invest in a SPAC or not is still in the hands of the account holder. In the context of retirement investing, a Self Directed IRA has even more responsibility to perform proper due diligence. Research the SPAC carefully, try to find out more about the target acquisition, and get professional advice whenever possible. And, of course, keep in mind the golden rule of diversification. It would never be wise to put all your eggs in one SPAC basket.