News and Commentary

Let’s Talk About SPACs By Todd A. Moll, CFP®, CFA

Special purpose acquisition companies, or SPACs, have garnered significant media and celebrity attention over the past few years, resulting in increased interest from investors. Amid more recent market turbulence, the Security and Exchange Commission (SEC) has stepped up its regulatory authority over these acquisition vehicles, urging investors to conduct thorough due diligence before investing their money.

What is a SPAC?

A SPAC is essentially a publicly traded shell company set up by founding “sponsors” with no specific business plan, assets or purpose other than to raise capital and acquire or merge with a
private company that it then takes public. For those private companies, SPACs offer a faster, easier and less rigorous compliance process than an IPO to raise large sums of capital, access the public equity markets and fuel their ongoing growth.

Sponsors raise capital in an initial public offering (IPO), issuing SPAC units to the public based on the premise that they will later acquire or merge with a company in a particular industry. However, because the capital raise and IPO occur before the SPAC identifies a specific merger or acquisition target, initial investors are essentially trading on a sponsors’ track record and its
speculations of what the future business may look like and how much that eventual company wll be worth. In other words, investors are making a bet on a blank check company, entrusting
SPAC sponsors to acquire or merge with a profitable entity that can boost share price and yield strong returns for investors in the future.

If the SPAC does not identify a target company and complete a merger or acquisition within two years of its IPO, it must return all capital to investors.

How Does an Investment in a SPAC work?

Initial investments in a SPAC are priced at a floor of $10 per unit, which are put into an interest bearing trust account to ultimately finance a future merger or acquisition. Each unit represents a
certain number of shares in a yet-to-be-determined company as well as warrants investors may redeem to purchase additional shares in that company at a discount in the future. In the early stages following a SPACs IPO, investors’ warrants become more valuable when share prices rise, and they may withdraw their units when prices fall, essentially limiting initial risk.

Once sponsors identify an acquisition target, they may begin projecting future valuations and issuing more shares, often boosting share price. In fact, shares in many of the high-profile SPACs completed over the past two years have swelled immediately after the announcement of a merger target, allowing sponsors and initial investors to turn quick profits.

Whether or not a deal goes through depends on shareholders, who have the right to vote on proposed mergers/acquisitions. If approved, the merged/acquired company takes the SPAC’s place on the stock market in a reverse-IPO that avoids what would typically be a rigorous, costly and time-intensive process of regulatory scrutiny. At that point, investors may either exchange their original shares for shares in the combined company or redeem them at the net asset value (NAV) of $10 per share plus interest.

Who are SPAC Sponsors?

Sponsors of the current glut of SPACs include institutional investors, titans of private equity, hedge funds and business and more recently celebrities, athletes, media companies and even
politicians. The Securities and Exchange Commission (SEC) urges investors to avoid becoming swayed by the hype of celebrity endorsements and thoroughly investigate SPAC sponsors,
including their business background and track record of success, before making any investment decisions.

What’s the Outlook for SPAC Investing?

According to SPACInsider, there have been 438 SPAC IPOs from Jan. 1, 2021, through Sept. 22, 2021, almost double the amount for all of 2020, and there are currently 440 SPACs in the active process of searching for an acquisition target. However, according to Goldman Sachs, a majority of this year’s SPAC IPOs are trading below their $10 offer price.

While this is not to say that SPACs are bad investments or that their boom is about to go bust, investors must recognize that SPACs are highly speculative and subject to intense volatility. Rather, individuals should conduct through due diligence, investigating the sponsors and the industry targeted for merger before investing.

About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-8888 or via email at

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk
that the acquisition may not occur or that the customer’s investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless
of strategy selected. Past performance is not a guarantee or a predictor of future results.

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Posted December 2, 2021