What's a SPAC and how does it help startups in raising money? Decoded

SPAC is the new buzzword in the deal-making space. It stands for a special-purpose acquisition company and it is a new way for a company to list in public markets. It is becoming very popular with founders in India and abroad.

So, what is a SPAC and how does it work? Let’s dive in.

A SPAC is essentially a shell company set up with the sole purpose of raising money through an IPO to eventually acquire another company. Usually a SPAC is created, or sponsored, by a team of institutional investors, hedge fund managers, and high-ranking CXOs. 

SPACs are a way for companies to become publicly traded in a way that’s often less complicated than initial public offerings, or IPOs. Going public by agreeing to be purchased by a SPAC reduces the red tape and costs associated with a traditional IPO. The latter involves banks that underwrite the deal, roadshows for potential investors and high levels of financial statements.

SPACs generally have two years to search for a private company with which it merges or acquires it. If a SPAC hasn’t merged with a company within two years, the money is returned to shareholders. This hypothetically makes SPACs less risky than traditional IPOs.

SPACs are particularly popular in the US. Virgin Galactic, DraftKings and Nikola Motor have all entered public markets by merging with SPACs. WeWork and Buzzfeed are also considering doing that. In fact, roughly 200 SPACs went public in 2020, raising about $64 billion, nearly as much as all of last year’s IPOs in the US.

In India, Renew Power became the first company to list on a stock exchange in the US through the SPAC route. It merged with RMG II and began trading on August 24th. Several other local start-ups are also said to be considering this route.