What You Need to Know About SPACs Before You Invest

“SPAC” stands for “special purpose acquisition company,” and it’s a business entity that’s being used to take private companies public.  

SPAC Recap

SPACs are legal business entities that don’t have any assets or conduct any sort of business activity. In effect, they’re empty husks.  

SPACs and Acquisitions

As for how a SPAC takes a company public, the process is basically a reverse-merger, when a private business goes public by buying an already public company. 

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How Do I Invest in SPACs?

SPACs are designed to raise money so that they can acquire their target. Since they’re publicly traded, it’s pretty easy to invest in SPACs—in most cases, a brokerage account is all that’s required. 

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If a SPAC does not acquire a target within a specific time frame–typically two years–it could liquidate. 

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5 Things to Know Before Investing in SPAC

Failure to Find Target

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Investor Dilution

SPAC investors also run the risk that their shares could be diluted, or lose value. Though an investor may buy into a SPAC at $10 per share, the SPACs sponsors—the folks running the SPAC—may throw in additional funding that can erode the value of those shares.

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Many companies that go public via a SPAC transaction don’t do so well after the merger. Their stock values don’t perform as many investors have hoped.

Poor Performance

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