Editor’s note: Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law discuss SPAC’s the hottest trend in capital raising.

JIM:  What’s the hottest deal in town these days?

BENJI:  I’m seeing a lot of SPAC deals recently.

JIM:  What’s a SPAC?

BENJI:  SPAC is an acronym for “Special Purpose Acquisition Company.”  SPACs are publicly traded companies that are organized for the sole purpose of acquiring another business, not to conduct their own business.  They are sometimes called ”blank check” companies, because when the SPAC raises money in its IPO investors don’t know the specific business the SPAC will acquire.

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JIM:  So, why is there so much interest on SPACs now?

BENJI:  As usual, it’s all about the money – BIG MONEY.  Public investors are putting a lot of money into SPACs and SPACs are buying a lot of private businesses.  The Wall Street Journal recently reported that about 300 SPACs have raised about $90 Billion.

JIM:  WOW!  That’s a lot of money chasing deals.  Let’s put that number into perspective.  The National Venture Capital Association touts that the U. S. venture capital industry manages approximately $400 Billion of Assets Under Management (AUM), but that entire U. S. VC industry’s “dry powder” at the beginning of 2020 was only $120 Billion.

BENJI:  Dry powder is the term the VC industry uses to describe capital that isn’t already tied up or in long-term portfolio company investments that haven’t exited yet.

JIM:  So, SPACs have almost 75% of the amount of dry powder that the entire U. S. VC industry has ready to invest.  Since a big part of VC dry powder is reserved for follow-on investments in existing portfolio companies, SPACs have probably already surpassed the entire U. S. VC industry in money available to invest in new deals.

BENJI:  That’s a good way to look at the SPACs trend.  They seemingly came out of nowhere and suddenly they’re a big player measured by “dry powder.”  No wonder so many people are talking about SPACs these days.

JIM:  Yes.  That’s because SPACs have direct access to investors in public markets.  They can quickly raise tens of millions or hundreds of millions of dollars shortly after they complete their SEC registrations.  SPAC Insider reported the average 2020 SPAC IPO raised $334 Million of dry powder. The VC industry acts in slow motion by comparison.

But, are SPACS new?

BENJI:  No.  SPACS have been around a long time.  They ebb and flow depending on market conditions.

JIM:  That’s right.  My first SPAC deal was in 2006, I brought a company public using a SPAC.  Of course, the SPAC industry was much smaller then, but the basic principles are the same.

To show the growth of the SPAC industry, a Harvard Law School publication in 2018 reported that 80 SPACs raised a total of approximately $19 Billion during the four-year period between 2014 to 2017.

SPACInsider.com reported that during 2019 SPACs raised $13 Million. but during 2020 increased more than 600%, when 248 SPACs raised approximately $83 Billion and that in January 2021, 91 SPAC IPOs raised another $25 Billion.

That is powerful acceleration, but will SPACs continue on that trajectory?  Or will they fall back to earth?

A recent article in The Wall Street Journal pointed out that many day traders have invested in SPAC IPOs.  That raises the question of what happens to SPACs, if the day traders move to another investment flavor of the month?

BENJI:  OK, I think we’ve proven that SPAC’s have become major players and that the trend still seems to be growing, but it’s uncertain whether the trendline will continue.  So, let’s take a break and discuss in future articles:

  • how to determine whether going public in a SPAC merger is a good alternative for a business
  • SPAC deal terms
  • how to get a SPC deal done
About the authors

Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law