SPAC: An Aid to Start-Up Culture

By – Anuvrat Arya

We live in a world of cutthroat competition in which companies every day come up with new innovative methodologies and techniques to impact the lives of the people in the most effective way. Seeing the ever-rising start-up culture, it has been observed the past years that most of the top employees or the best performing individuals of a company get lured to the fact of starting their own company in pursuit of better financial standing and to impact lives through their services or products, but  we do know that starting a company is not a cakewalk.

To become a full-fledged functional multi-national company the very idea of starting a business has to go through various stages for the fulfillment of the biggest objective that is the expansion of operations.

The initial stage of becoming a big company starts from being a mere start-up in the diverse world of innovations and nowadays who doesn’t aspire to become an entrepreneur and wants to make their startups known to the world like Byjus, Paytm, Urban company and Airbnb et al.

Nowadays, Start-up is the new path-breaking word that is on the tongue of all the young minds and business enthusiasts. If one had uttered the word start-up five years ago one wouldn’t have got so many inspiring and intriguing business stories and ideas that one gets today.

The ladder to the point of becoming a big company has a lot of checkpoints and one of the most important of them is issuing an IPO. It is obvious that one reaches the stage of issuing an IPO after having a rally of successive events like good valuations, better performance, and growth acumen.

Raising an IPO is a costly affair as it involves an exorbitant cost in the form of merchant banker fees, underwriting commission, legal fees, and promoter’s fees et al. Now, this is when SPAC comes into the picture.

A SPAC (Special Purpose Acquisition Company), also known as a blank check company, bears some resemblance to an IPO. SPAC is less expensive than an IPO. When experienced and reputed individuals with great business acumen form a team for the sole purpose of sourcing funds from investors it leads to the creation of SPAC.

SPAC is a shell company which doesn’t have a merger target at the time of its creation. Since it is a shell company, the founders become the selling point when sourcing funds from investors. The initial capital for the company is provided by the founders of the company and they stand to benefit from the sizable stake in the acquired company.

The company has time close to two years for raising capital from the investors and failing to do so leads to the dissolution of SPAC. When issuing an IPO, the management team of SPAC contacts an investment bank to handle the IPO. The investment banks usually charge ten percent of the proceeds from IPO which doesn’t term as hefty as issuing an IPO through the traditional process. All said and done, through SPAC a budding entrepreneur can raise money through an IPO without going through the hassles of raising an IPO.

SPAC is beneficial for the founders but what about the interest of the investors?

The aforementioned question is reasonable enough for investors to not park their funds in SPAC but SPACs safeguards the interests of the investors too.

If an investor doesn’t like the company that the founders have put all the money in, they have an option to sell their shares but to keep warrants. The shares sold to the public also comprise a fraction of the warrants.

A warrant is a right that an investor holds to buy a certain number of shares after the merger, which means that even after an investor opts out of a transaction due to a possibility of upside, the investor can still gain some money out of it. For example, if a price per unit in the IPO is 10, the warrant may be exercisable at $11.50 per share. The warrants become exercisable either 30 days after the De-SPAC transaction or twelve months after the SPAC IPO.

SPAC is an unconventional way of raising funds but it saves one from the hassle of going through the conventional routes as it leads to faster execution than IPO. A SPAC occurs in three to six months on an average whereas IPO takes around twelve to eighteen months. Some of the established names to go public through SPACs include DraftKings Inc, ChargePoint Holdings, Inc, Virgin Galactic Holdings, Inc, Nikola Corporation, and Opendoor Technologies Inc. One of the most anticipated SPAC-facilitated IPOs of the past few months has been the stock market debut of Virgin Galactic Holdings, Inc, which in itself reflects the potential of SPACS to an extent.

SPAC leads to operational expertise too, as its sponsors are experienced industry professionals who often use their contacts and their intellect for the expansion and growth of the company. With this, SPAC sponsors can also raise debt funding in addition to their original capital to not only fund the transaction but also to fuel growth for the combined company. This backstop debt and equity are intended to ensure a completed transaction even if some SPAC investors redeem their shares.

SPAC is booming overseas from singer Ciara to the former U.S. speaker of the House Paul Ryan have jumped on to the bandwagon. Many other notable public figures like Alex Rodriguez, Serena Williams, and Stephen Curry have been involved in SPACs.

Shortly, SPAC looks promising, and looking at the current scenario it would considerably prove as any aid to the start-up culture by reducing complexities and by transforming current teams into future multinationals. 

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