What is SPAC (special purpose aquisition company) and is it worth investing in?

Most Polish investors do not know yet what SPAC is. However, probably soon everyone will know this date, because we are talking about an idea for investments in difficult times. And times for investors are extremely hard right now.

What is SPAC

SPAC stands for special purpose acquisition company, translating into Polish - a special purpose acquisition company. It is a company whose activity consists solely in looking for another enterprise to take over, with virtually no assets on the asset side. This is nothing new in the financial world, such companies have existed for at least several dozen years and are in fact a specific form of investment funds. However, so far, due to the particularly high level of risk that investors have to take, they have not been particularly popular. Everything has changed in recent months.

Łukasz Blichewicz

In the US, investors scared of rising inflation and zero interest rates are ready to take greater and greater risk, just to avoid investing their funds in unprofitable bank deposits. They do not even mind that they do not know which company is to be the target of the acquisition or what the final goal of the acquisition company is. What's more, American SPACs, not having the appropriate competences to do so, more and more often take over companies at the initial stage of development, and then the investment risk becomes even greater.

However, it cannot be denied that SPAC companies can very effectively support the development of startups. Their biggest advantage is that they are established immediately in the form of a public company and are listed on the stock exchange. The takeover of a startup takes place in the form of a merger of both companies, which means that the acquired entity automatically becomes a listed company. Thanks to this, it can more effectively raise funds for development.

In the United States, it is a rule that the funds obtained during the issue of SPAC shares are collected on a special account and may be used only for the purpose of acquiring the acquired enterprise. If there is no acquisition approved by the shareholders within the set time limit, the company should be dissolved and the funds paid by the shareholders returned to the shareholders.

SPAC examples

Currently, the most widely commented example of a company growing thanks to its merger with SPAC is Nicholas Corporation. The company, founded in 2014 in Salt Lake City by billionaire Trevor Milton, works mainly to bring electric and hydrogen trucks to the market. Thanks to the merger with a company of the

Nikola Corporation trucks

SPAC - VectoIQ, Nikola Corporation has been listed on the stock exchange since July this year NASDAQ. Investors must place great hopes in the company's plans, as it is worth nearly $ 10,5 billion, despite the fact that it has not sold a single car yet, and its turnover in the first 6 months of this year was only $ 95. Nikola's stock market value is roughly a quarter of the value of such giants as General Motors or BMW.

However, Nikola has a lot of trouble. The analytical company Hindenburg Research accused it of numerous financial frauds. In addition, allegedly, a spot filmed in 2018 showing Nikola's truck driving in the desert turned out to be manipulation. The vehicle had no drive and was driving downhill! The research firm's report was unlucky enough to see the light of day just days after Nikola's stock exploded following the announcement of a collaboration agreement with General Motors. Currently, Nikola is under the microscope of the US Securities and Exchange Commission and the Department of Justice.

The company's troubles resulted in a lively discussion about the risks faced by investors in SPAC companies. The internet bubble of the early twenty-first century has long taught investors not to trust companies that have neither documented income nor competences in the field of young enterprise development. It is clear that many of them have already forgotten this lesson. However, where the risk is high, there can also be huge returns. As usual, those who, thanks to the built experience and developed competences, will be able to best estimate the risk taken will earn the most.

Author: Łukasz Blichewicz - co-founder and CEO of the Assay Group, expert in the development and financing of technology companies.