SPACs are the flavour of the month on Wall Street, but they are a highly speculative investment and a lot needs to go right for them to pop.
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For some everyday investors, few things are as rewarding as tracking a company’s progress through the process of going public, then scoring a pile of shares just before the initial feeding frenzy drives their value through the roof.
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But there’s a way to get in on the excitement and growth potential of initial public offerings (IPOs) without waiting until a company actually goes public. Though the research shows they’re risky, investors have been piling into special purpose acquisition companies, or SPACs.
SPACs are publicly traded entities that allow investors to get into the IPO action far earlier in the process — before they even know what company they’ll be investing in.
Here’s how SPACs work and how they can make — or lose — you money.
An old strategy with a new name
SPACs are nothing new. They first started gaining traction among Canadian investors about 20 years ago, when they were known as “capital pool corporations.”
Despite the new moniker, SPACs and CPCs are essentially the same thing: a publicly-traded company whose sole purpose is to raise the funds it needs to merge with a private operating company, navigate the new entity through the IPO process and take it public.
When you invest in a SPAC, you’re not investing in a traditional company that produces goods or has a history you can track. You’re really buying shares in a concept: the kind of company the SPAC hopes to become. In that regard, it’s a highly speculative investment.
“Shareholders are basically betting on the credibility of the sponsor,” Manoj Pundit, a securities partner at Borden Ladner Gervais LLP, said in a recent interview. “So if the sponsors make a poor choice, then of course the shares may go down in value.”
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