Special Purpose Acquisition Companies (SPAC)Advantages and Disadvantanges of SPAC

April 9, 20210

In the continuous attempt to guide on SPAC, in this third series on SPAC, we are dealing with the advantages, disadvantages and risks of SPAC.

Advantages of SPAC

It yields better results than traditional IPO’s.

It has a fixed time frame ascertained with it.

It provides for better pricing structure in active structures with the sponsors of the target company to raise capital in favourable terms hence setting itself apart from the traditional IPO’s.

It speeds up the process of a Company going public.

Valuations and funds are also raised.

It offers greater control over terms of the deal.

SPAC has less regulatory scrutiny.

SPAC makes it easy for high leverage company to go public which is difficult in case of an IPO.


Disadvatanges of SPAC

The valuation of the target coup is significantly lowered as the SPAC structure is less risky for the company planning to go public, which makes riskier for SPAC itself as they are compensated with heavier discounts, than it should actually be.

The investors are basically investing in a blank check company which means they merely provide funds with no idea as to which will be their acquisition target.

There can be a conflict of interest if the company does not fit into the expectations and as a result of which investors might back out.

The charges included In SPAC involves underwriter’s fees as well as other charges which might exceed the payment made to investment bankers in IPO. There is less amount of scrutiny of the target company business.


Risks under SPACs

Companies that merge with SPAC and become public are subjected to less scrutiny as compared to the traditional IPO process. There is always a possibility of misrepresentation of investments to attract the investors and raise funds.

SPAC sponsors can gain profit from an acquisition even if it is unsuccessful for the investors. This has high potential for conflict of interest and fraud on the basis of misuse of funds by way of misrepresentation or omission of prospects of the company.

Fluctuations in the market prices of SPACs can be risky as investors don’t see it as an advantage to the investment. For instance, a unit of the SPAC which is priced at 10$ might fluctuate and investors might be sceptical to buy at an increased price.


Why is SPAC relevant in today’s context? 

Despite of the pandemic, the year 2020 saw many IPOs through which historic amount of capital was raised. As demand for money raised via public route has increased, companies are carving out methods through which this capital can be raised in the most effective manner.

In an emerging market like India, attractive valuations of companies that have gone public have allured a huge number of companies to opt for a similar approach.

SPAC allows flexibility of operations and a greater deal of transparency at the time of execution of transaction with companies. SPAC being a serious affair because of various securities regulations; it provides a platform for investors to exercise their rights securely and without any worry.

Further, as more and more IPOs are lined up for listing, the role and activity of SPAC will increase and thus establish a whole new avenue for merger activities for private companies.

For any feedback or query, feel free to connect with mumbai@amlegals.com

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