The biggest trend in investing right now is the rise of SPACs (special purpose acquisition companies) –– sometimes called “blank check companies”).
If you’re an Angel Investor and you don’t know about the IPO/SPAC phenomenon we’re living through right now…
Well, shame on you.
I believe it’s so important, in fact, that this Tuesday (Oct. 27) I’m hosting a live event dedicated to what I call “IPO MANIA”.
Not only will I break down the IPO landscape, but I’ll also reveal our biggest investment yet…in an EV (electric vehicle) startup that has their sights set on a potential 2021 exit.
As of today, there have been 325+ IPOs this year (up a staggering 76% over last year).
More than one-third of the IPOs have come by way of a SPAC.
What’s so important about SPACs?
What does it have to do with you as an Angel Investor?
I’ll break it down all down for you, and explain how to take advantage of the latest trend in IPO investing.
IPOs and SPACs
Much of the IPO activity we’re seeing this year is fueled by SPACs that go public for the sole purpose of acquiring a fast-growth startup.
This is important to the Angel Investing community because, well, we love investing in fast-growing startups!
SPACs make it easier for companies to go public. And when companies go public, their investors typically make some big-time cash.
Now, let’s look at the difference between an IPO and a SPAC, the advantages of SPACs, what is causing the boom of SPACs, and why it should matter to YOU and the rest of the angel investing world.
An IPO, or initial public offering, is the typical route for a private company looking to go public.
A company goes public to sell more stocks of the company to raise capital. Before the IPO, all of the funding the company earned was from private investors like angel investors or venture capitalists. At the time of the IPO, these early investors can sell their shares to realize their gains.
Before a company can find itself on NASDAQ or the New York Stock Exchange it must grow in the private market.
But, it’s more than being big –– they must also pass rigorous SEC evaluation.
I’m talking about establishing antitakeover defenses, auditing, building up corporate governance, starting media and investor relations…
Actually qualifying for an IPO takes a few more, quite complicated steps. This usually begins with the private company, or issuer, shopping around for an investment bank to advise them on the IPO and provide underwriting services.
The underwriter (bank) will act as a broker between the issuer and the public, helping assess the value of shares and establishing a public market to sell those shares. For their services, underwriters take fees on a per-share basis.
Working with the underwriter, the company must then go through the complicated process of filing with the SEC. This involves due diligence, filing forms, responding to SEC comments and amending the registration statement, negotiation the price amendment and underwriting agreement, and lots of meetings and waiting in between.
The filing process alone usually takes three or more months.
That may be a lot to take in, but that’s just the half of it. This is a challenging and complex process. There is a reason that very few companies go public.
A SPAC is a special purpose acquisition company. SPACs have no commercial operations. They don’t really do anything that you would expect a company to do, they are formed for the sole purpose of going public through an IPO to raise capital so it can acquire another company.
SPACs are usually formed by veteran corporate leaders who intend to pursue acquisitions within their industry of expertise.
Investors finance the SPAC mostly based on the talent of its management team. There isn’t much else to go off, just its team’s experience and their promise that they will find a successful startup to acquire.
Once the SPAC is public, it can acquire an attractive startup, merge the two companies, and change their stock ticker name to the startup’s name. And just like that, a private startup can be publicly traded, skipping over the challenges of an IPO. That is what the SPAC craze is all about.
You may be asking — before the acquisition, why do investors choose to invest in SPACs?
Well, rather than betting on a private company that may or may not go public, investors can bet on a SPAC that is far more likely to “go public” once they acquire a company.
If a SPAC gets enough public interest and funding to go public, it sets away its funding in an interest-bearing trust account. These funds can only be used to complete an acquisition or return the money to investors if the SPAC is liquidated. Generally, a SPAC has just two years to complete an acquisition or it will be forced to liquidate.
SPACs are attractive to startups for many reasons.
Firstly, it offers an alternative path to the public market, one that doesn’t have the same requirements and difficulties as a standard IPO. Even startups that would be denied by the SEC can go public through with a SPAC.
Next, SPACs are often value-adding for the startup. SPAC leaders usually look for a deal within their industry of expertise, meaning they bring valuable experience to the table. Much like in angel investing, joining with an experienced, helpful partner helps to guide and grow the company.
According to SEC rules, before a traditional IPO, the company must stay quiet and refrain from promoting its shares until trading begins. SPACs have an advantage here as they can promote themselves well before the acquisition takes place and the new company has its IPO. This way, huge amounts of public support can grow before the offering, improving the chances of its success.
SPACs have seen a major resurgence recently. SPACs have been around since the 1990s as a way for smaller companies that couldn’t go the traditional IPO route to gain access to public markets. Then, SPACs waned during the tech boom where traditional IPO activity took over.
What we have today with SPACs is very different from the ones of yesteryear. Modern SPACs have been transformed by new SEC regulations, new structural and procedural standards, and the support of major underwriters like Goldman Sachs, Credit Suisse, and Deutsche Bank.
This next generation of SPACs is safer and more attractive to investors.
Another way of looking at it is just another case of “right place at the right time”. Many big SPAC deals like DraftKings, Nikola Motors, and Virgin Galactic have become hot topics in the investing world. Awareness of this method is higher than ever.
More than that, in the current market, SPACs just work. Traditional IPOs have been on a decline for the past few years. Companies are looking for liquidity and access to public markets, but they are hard to come by. Now, SPACs pop up again, founded by reputable and successful investors and entrepreneurs, and with a new set of rules.
The market was desperate for a solution like this, and we are now seeing the results
For Angel Investors
While some investors are investing in the SPACs IPO or the post-acquisition IPO, the highest profits still usually come from early-investing in the startups themselves.
What this means for early investors is a better chance of exit. SPACs are just another tool that companies can use to go public, giving you a chance to liquidate and profit.
What’s more, as the SPAC phenomenon continues to heat up, we are seeing its potential to dramatically reshape the startup ecosystem. We could see a far greater number of startups going public than ever before.
And these smaller, high-growth companies could become a much larger and more common feature of public markets. This would mean an extremely bright future for early-stage investors and entrepreneurs.
We just invested in what we believe is the next hottest EV (electric vehicle) company tracking towards an IPO Q3 2021. Don’t miss the BIG REVEAL Tuesday, October 27th at 8PM ET