SPACs have been making headlines lately, with 2020 being dubbed the “year of the SPAC” by more than one outlet. They have raised a record $37.5 billion in proceeds so far this year, and outpaced IPOs in stock issuance in July and August. SPACs have been launched by everyone from hedge fund manager Bill Ackman to former House Speaker Paul Ryan.

Here is a brief overview of what they are, why they're becoming so popular, and what you should consider when investing in a SPAC.

What is a SPAC?

Also called “blank check companies,” special purpose acquisition companies (SPACs) are firms whose sole purpose is to raise money via an initial public offering (IPO) to buy another operating company. At the time of its IPO, a SPAC has no existing operations or targets for acquisition, though some SPACs do target one sector or industry. Funds raised from investors are held by the SPAC in a “trust.” The goal is find a target within (typically) two years, otherwise the SPAC returns funds to investors. Once the SPAC pinpoints a seller, the merger is completed and the target becomes a listed stock.

Compared to a traditional IPO, a SPAC can offer the following benefits to both investors and the target companies:

• Speed: A SPAC can be completed within 3-4 months, from letter of intent to closing. Compare that to a traditional IPO, where the period from initial prospectus draft to closing is typically 6-9 months or more.
• Transparency: Investors know exactly how much they are getting for their shares in a SPAC transaction. With a traditional IPO, the share price is subject to stock market fluctuations.
• Safety: Money raised during the SPAC IPO sits in trust until an acquisition is made. Investors are protected by the contractual obligations of the acquirer, which provide investors the option to exit if they so choose.
• Ease of execution: SPACs do not require the traditional IPO’s “road show,” an intensive period during which management presents their sales pitch to investors in various locations around the world. Furthermore, the process of a traditional IPO incurs huge costs and involves many disclosure and financial reporting requirements.
• Liquidity: Opting for a SPAC IPO can provide more immediate capital to a company when market conditions are not optimal for a traditional IPO. More on this below.

Why have SPACs been so popular in 2020?

SPACs have taken off in 2020, reaching $37.5 billion in value so far and racking up a record-breaking 94 deals. In July and August, SPACs raised $20.5 billion, exceeding traditional IPOs ($17 billion) for those two months straight.

There are many reasons SPACs have been more popular this year, including:

• Flexibility: Investors are often drawn to new growth companies, and SPACs can pivot quickly and easily to industries or sectors that are immediately more attractive due to changing market conditions.
• Excess liquidity: High levels of liquidity this year has left investors searching for best opportunities for investment. The proliferation of SPACs has provided an opportunity for upside potential, as investors bet on improvements in the economy.
• Uncertainty: Traditional IPOs rely on market timing and have therefore limped along this year against the backdrop of the coronavirus pandemic. SPAC investors enjoy both greater upside potential in this environment as well as downside protection with the option to leave the investment.
• Virtuous cycle: Over the past few years, as more credible SPAC sponsors (i.e., Goldman Sachs, Apollo, Bill Ackman’s Pershing Square Holdings) have engaged with higher-quality firms, more top-tier investors have taken note and allocated funds to SPACs. A virtuous cycle results, where more top-tier firms get involved, bigger-name SPAC deals emerge, and the investor base grows. In theory, the cycle continues.

What should I consider before investing in a SPAC?

Despite their surging popularity, there is currently a dearth of data available to evaluate SPACs. When you invest in a SPAC, you're putting your money into a blind trust that will remain dormant until the management team decides which company to take public. Some SPACs are focused on specific sectors, but there is still typically a very wide universe of potential target companies.

With little to no knowledge on what company is going to be targeted by a SPAC, you are instead left to make qualitative judgements on the experience and expertise of the SPAC sponsor and management team. This can be difficult to evaluate, because SPACs are often started by individuals with no track record in investing. By reading through a SPAC's prospectus (particular, the "Management" and "Proposed Business" sections), you can get a better idea of the management's background and what they're looking for when searching for a target company

These prospectuses are filed with the SEC as Form 424B4 or Form S-1. At Quiver, we have been scraping the SEC website every day to find the most recent filings by blank-check companies. With our SPAC dashboard, you can quickly find more information on the newest SPACs (including their tickers and the amount they've raised), along with links to their prospectus filings.