Special Purpose Acquisition Companies (SPACs) have spread widely in the USA, then in Europe, and have recently gained the attention of Asian markets. SPACs provide an alternative way of listing on capital markets, instead of the typical Initial Public Offerings (IPO). Because of their unique features, SPACs are attractive to a category of companies that may not find the IPO path suitable. For investors, SPACs provide a new investment product that allows them to diversify their portfolios.

In short, SPACs are established by a group of founders with one goal only: to acquire a private company during a specified period of time. The SPAC’s units are listed on the capital market through an IPO. At the same time, the founders start searching for a promising company to acquire. If a company is selected and the shareholders of both the SPAC and the target company come to an agreement, the SPAC funds will be transferred to the target company and the units of the SPAC will be replaced by shares in the target company. With that, the target company is listed on the capital market without the need to go through an IPO.

SPACs are shrouded in a lot of uncertainty when they are established, as nobody knows for certain whether the company will succeed in acquiring a successful company. That’s why investors pay great attention to the experience of the founders and structure the deal with the founders in a way that motivates them to produce the best outcome. Furthermore, many capital market authorities enforce several regulations to align the founders’ interest with current and potential investors and to ensure that the founders are qualified to carry out the SPAC’s objectives.

SPACs have several advantages compared to IPOs. For investors, SPACs enable them to invest in promising private companies before they are listed in the market. They also allow investors to invest more money in the company compared to typical IPOs. Moreover, SPACs benefit the experience of the founders and their ability to select one of the best companies available for acquisition.

For target companies, listing through a SPAC is attractive because of its fewer requirements, lower costs, and shorter duration. In addition, negotiations are limited to a small group of specialists and withdrawal is easy in case the proposed deal was not satisfactory. For regulators, SPACs enable a new path to listing, which helps in increasing listings in the market, attracting new types of companies to the market, and diversifying investment products available for investors.

On the other hand, SPACs come with some disadvantages, as the founders may fail to complete a successful acquisition deal. The less stringent due diligence can increase the margin of error in assessing the value of the target company. In addition, investor’s ownership in SPACs is significantly diluted due to the sizable share allocation that founders receive as a succuss fee.

From the viewpoint of target companies, SPACs lack the publicity and marketing that usually comes with typical IPOs. Also, there are no underwriter guaranteeing the completion of the transaction. For regulators, are the lesser due diligence and filling requirements may lead to listing poor companies that might cast a shadow on the capital market.