I’ve been working in the investment advice field for nearly 28 years now, but I am still learning new concepts at a regular pace in this complex business. Some of the more recent things to learn involves the recent increased prevalence of what is called a SPAC and it’s extremely close sibling the direct listing.
When discussing SPACs, what this odd-sounding acronym stands for is Special Purpose Acquisition Company, which does pretty much zero to better describe what these financial vehicles are and why are seeing more of them.
When the term is Googled, it leads to a description saying a SPAC is a “blank check acquisition vehicle,” as if this somehow better describes the issue. I think this topic is timely and could be important to some readers, so I’m going to try to cut through the obscure technical talk and try to shed some common sense light on this subject.
Rather than go through the history of SPACs, including any previous opinions on these vehicles, I want to talk about why 2020 has been dubbed a record year for SPACs, and why I think this is.
Where SPACs have entered the lexicon lately is in the area of bringing new companies to the stock exchange in a process called an Initial Public Offering, or IPO. The traditional process of bringing a new stock to market involves a group of investment banks conducting a tedious and lengthy process to market the new company stock to institutional investors in a kind of dog and pony road show, and beyond the typical uncertainty of a volatile mature bull market, combined with a contentious election year, 2020 has COVID, which has made the process of running an effective road show even more awkward and difficult.
In August, however, the New York Stock Exchange received approval from the Securities and Exchange Commission to enable companies to simultaneously sell privately owned company stock and raise additional capital from public investors through what is being called a direct listing, instead of an Initial Public Offering, which is functionally similar to using the SPAC structure.
These direct listings are simpler to conduct from a regulatory process perspective, quicker to bring to market and potentially expose the company to less stock market fickleness as well. Typically, with a direct listing, like a SPAC, a primary, single, institutional investor takes a large chunk of the offering at the same time as smaller, or retail, investors are able to buy the stock through the direct listing on an exchange.
In my opinion, these types of listings work better when the company itself is already well known to the investing public, and looking at the companies utilizing this process in 2020 bears this out as well. Companies such as high-profile electric concept vehicle maker Nikola and online sports book DraftKings used SPACs, and Spotify, Slack, Space-X and, more recently, well-known data analytics firm Palantir all used direct listings to list their shares.
Functionally, I’ve observed stock offerings using SPACs and direct listings seem to come to market with a little less hype, but at the same time the listings themselves have seemed less “wild” when they finally do start trading. These are, however, only observed perceptions, and these trends may not ring true with future offerings.
So, in a final attempt to simplify this topic, both SPACs and direct listings offer companies a more predictable and flexible way to raise capital using the stock market. If the trends of the last few years continue, investors should get educated and comfortable with these terms to better access new investment opportunities going forward.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC.