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What Could Possible Go Wrong With That : SPAC’s or “Blank Check” Companies

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the staff of the Ridgewood blog

Ridgewood NJ, a special purpose acquisition company (SPAC) is a business entity devoid of commercial operations, created exclusively to generate capital through an initial public offering (IPO) with the intention of acquiring or merging with an existing company.

Commonly referred to as blank check companies, SPACs have been in existence for decades, but their popularity has surged in recent years. In 2020, there were 247 newly established SPACs that attracted $80 billion in investments. The trend continued in 2021, reaching a record-breaking 613 SPAC IPOs, a substantial increase compared to the 59 SPACs that entered the market in 2019.

Venture capitalist Chamath Palihapitiya touted SPACs as a means to level the playing field, providing everyday individuals with an opportunity to invest in high-growth companies. Figures like hedge fund manager Bill Ackman sought to employ SPACs to merge with unicorn companies, and even celebrities like Shaquille O’Neal joined the fray.

Despite the initial hype and optimism surrounding SPACs, the majority of these entities that emerged during the peak of the 2021 frenzy did not successfully complete mergers. Moreover, many companies that did undergo a merger process turned into disappointing ventures for average investors.

The failure of SPACs in 2021 raises questions about the reasons behind their shortcomings and whether they will experience a resurgence in popularity. Essentially, the surge in SPAC formations and mergers did not align perfectly. Many companies seeking SPAC mergers in 2021 ended up merging with SPACs that had gone public in the previous two years, missing the peak of the 2021 boom. The SPACs that joined the scene during the 2021 frenzy were, in most cases, too late to capitalize on the favorable conditions, and their success hinged on the continuation of prosperous times into 2022 and 2023. However, contrary to their expectations, SEC rule changes slowed down the SPAC merger process, coupled with a downturn in the stock market, leading to the fading allure of SPACs.

 

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