Framework

A SPAC is a shell company with no operating business of its own. The sole objective of this shell company is to raise capital through a listing. The proceeds are subsequently used to acquire a non-listed company within a limited period of time and to indirectly list it on the stock exchange. Which company is taken over in this way is not yet known at the time of the SPAC listing. Usually, only the industry of the target company is known. 

Within a maximum of 24 months, a SPAC must find a company to acquire. Once this transaction has been completed, a previously unlisted company has been indirectly floated on the stock market via the SPAC in this way. The initiators and management are considered a key success factor. The management team is often made up of industry veterans, private equity sponsors or other financing experts, known as sponsors, who use their expertise to raise capital to acquire and operate the new public company.

On the Frankfurt Stock Exchange, SPACs can be listed on the Regulated Market and thus in the General Standard or Prime Standard segments.

One share and one warrant - structure of SPACs

The issue of a SPAC consists of a share and an associated warrant. The share is often issued at a fixed amount such as 10 U.S. dollars, or 10 euros, and is privately placed in advance in large tranches, starting at 100,000 or 1 million, for example. The combination of share and warrant is a unit. At a fixed point in time, the share and warrants are separated and traded separately as common and warrant, often 60 days after the start of trading.

The warrant securitizes the right to buy the share at a fixed underlying value in a specific subscription ratio and therefore offers an additional profit option if the SPAC project is successful. In principle, the number of options issued (via the subscription ratio) is considered an indicator of the attractiveness or risk of the issue.

The SPAC project usually has two years for the takeover offer. The issue proceeds are to be paid into an interest-bearing escrow account. The purpose for which the issue proceeds are to be used is described in detail in the prospectus. The shareholders decide on the use of the proceeds with a majority of at least 50 percent. If a takeover proposal is made, it can also be rejected and the owners are paid their share, usually at the issue price plus an agreed interest rate. The same applies if the takeover of a company cannot be realized. In this case, the warrant expires worthless.

Opportunities and risks for investors

Private investors can usually only invest in a SPAC from the start of trading by buying it at the stock market price, which often fluctuates around the issue price. In the favorable entry lies the opportunity for investors, namely if the acquisition of a target company with strong growth potential and corresponding price fantasy succeeds.

The risks lie primarily in the significantly lower transparency requirement compared with the classic IPO. The target company is not known until the takeover and thus neither its business model nor its fundamental basis.

20 April 2021, © Deutsche Börse AG