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What Is a Special Purpose Acquisition Company, or SPAC?

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A SPAC, also known as a blank check company, is a company that doesn't have any actual day-to-day operations, but plans to raise money through an initial public offering so it can make acquisitions.

In 2020, the coronavirus has created a challenging environment to go public, as the IPO market has been highly unpredictable. So, many companies are turning to SPACs. Often, when a private company is looking to go public, but thinks that will be a tough undertaking, an alternative is to sell to a SPAC.

In a traditional IPO, the company goes through an almost year's-long process, one that involves a lot of dealings with the Securities and Exchange Commission. When selling to a SPAC, the process is just a few months, with lighter SEC involvement.

With a standard IPO, the company is hoping to price its shares at a certain level, but the wild swings of the market will have its say with price as well. SPAC acquisitions are pre-negotiated. The price is set upon agreement, providing shelter from market volatility. So this provides a fairly liquid, but more stable alternative to the IPO market.

The point: SPACs have emerged this year and they can provide opportunities for investors. Most SPAC deals are fairly small, but keep your focus on identifying promising businesses bought at reasonable prices.

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