Spac Sponsorship Mechanisms Explained and Investors' Key Points to Ponder

A Special Purpose Acquisition Company (Spac) is a corporate form that has been in existence since the 1980s, regulated by the U.S. Securities and Exchange Commission since 1990 to prevent fraudulent IPOs of penny stocks. These companies have gained renewed attention in recent years.

Spacs are designed to acquire a single company or business segment, and they must complete the acquisition within a maximum of 24 months after their founding. If they fail to do so, investors will receive their money back. However, before an acquisition can take place, it must be approved by the Spac investors.

Unlike traditional companies, Spac sponsors are not required to contribute capital. Instead, they can set up Private Investment in Public Equity (Pipes) to provide the Spac with additional capital at lower costs than the capital of the investors. This allows Spac sponsors to work more efficiently by raising capital at the stock exchange first and then searching for and buying interesting companies.

The "Hintermann" of a Spac, or the person or entity behind it, typically the sponsor or initiator, holds a significant portion of Spac shares without contributing much or any capital. This strategic position gives them a higher return compared to regular investors.

If a company takeover is successful, Spac sponsors receive company shares whose value far exceeds their capital investment. However, if the IPO is not successful, the Spac must keep the proceeds, minus the issuance costs, in a trust account or invest the money in bonds. If Spac investors decide to redeem their shares, they will receive their original investment back, minus costs and plus any interest. In the worst case, if a deal doesn't materialize, Spac sponsors return the money to their investors and are not penalized.

Spac sponsors have the advantage of having a network, industry knowledge, and having intensively analyzed the target company. They can negotiate the price of the target company, giving them a significant edge in the acquisition process. After the acquisition, a Spac cannot change its purpose.

In summary, Spacs offer a unique approach to corporate acquisitions, allowing sponsors to raise capital through an IPO and then search for and buy interesting companies. While they offer potential returns for investors, they also come with risks, particularly if the IPO is not successful or the acquisition does not materialize. As with any investment, it is important for potential investors to do their due diligence and understand the risks involved.