When a public company enters a Special Purpose Acquisition Company (SPAC), it goes through a complex entry process. This involves multiple stages, such as signing agreements with the SPAC company and its investors, transferring funds to the acquired company, and receiving shares in the purchasing SPAC company in exchange.

Can you explain what a SPAC is?

A SPAC, or Special Purpose Acquisition Company, is a stock exchange entity. Investors use their capital to purchase another company’s activities, making the acquired company a part of the stock exchange. In other words, a SPAC is a company formed solely to acquire and register a private company for trading on the stock exchange. This allows the target company to avoid the complexities of going public through the traditional methods of issuing shares and pricing them with the help of underwriters. According to the US Securities and Exchange Commission, a SPAC is created to raise funds and finance a merger or acquisition opportunity within a predetermined period, typically a year and a half or two years. If no transaction is made during this time, the SPAC company’s funds are returned to the public.

Are there risks involved in entering a SPAC Company?

Yes, there are several risks associated with the process of entering a SPAC Company. While some risks can be mitigated by purchasing appropriate insurance, others cannot. The primary hazards include market fluctuations and risks associated with capital markets. Should the deal be canceled and the financial markets experience a significant downturn, there may also be adverse effects on the company’s activity and performance.

Have you ever wondered why companies go public through a SPAC instead of an IPO?

The reason is that a SPAC offers an easier route to the stock market, especially when the capital market is less favorable. Unlike an IPO, the company’s initial valuation is set by private investors who own the SPAC rather than being determined by the capital market.

What Insurances are Required in Case of Entry of a Private Company Into a SPAC?

If a private company enters a SPAC, it is crucial to have insurance coverage in place. The company directors are responsible for the entry, and they are recommended to have D&O insurance. This is because they may be personally sued if the SPAC fails, even by shareholders who purchased shares of the SPAC that took over the company’s operations. Additionally, it is essential to have tail policy insurance to cover the acquired SPAC company and the newly merged company.