Personal Finance & Money Asked by Arya Lisa on May 24, 2021
From what I have understood, A SPAC shell co. is setup and raises funds through an ipo thereby getting a period of 2 years to find a company they can merge with.
Is there a specific reason that it works this way?
The capital sits in the shell company until a merger is chosen. Isn’t it a huge waste in capital that remains locked with no return or use until the merger happens.
A traditional IPO involves a lot of steps. The company has to find an investment bank. The investment bank has to do its due diligence, work out the agreement with the company, and make a number of regulatory filings. Sometimes the IPO involves a syndicate of brokers. Once approved by the SEC, there are roadshows to determine interest in the IPO. All of this takes a lot of time.
A SPAC raises capital via an IPO for the purpose of acquiring an existing company. While it may take time to find that company, once one is found and an agreement is made, the process is much faster.
The money raised by a SPAC is placed in an interest bearing trust account and is returned to investors if the SPAC does not find an acquisition. The interest may be used by the SPAC as working capital.
Answered by Bob Baerker on May 24, 2021
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