Conflict of Interest in Investment Banking
February 12, 2025
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Special Purpose Acquisition Companies (SPAC) have become all the rage in the investment banking industry. They are not a new concept. They have been around for quite some time. However, they have become quite popular in the recent past. For instance, in the first half of 2020, $13.5 billion dollars were raised by Special Purpose Acquisition Companies (SPAC). This is greater than all the money which was raised by these companies in 2019. The trend is hinting towards a 100% increase within a short span of one year! In this article, we will understand what Special Purpose Acquisition Companies (SPAC) are and how they are used by investors and investment bankers.
Special Purpose Acquisition Companies (SPAC) are companies that are publically traded but do not conduct any specific business. In common parlance, they can be referred to as shell companies. This means that there is a management which appoints investment bankers who help the company with an IPO. However, after the proceeds have been received, there is no immediate business that the company starts. Instead, the company just keeps on holding the money and waits for a merger and acquisition opportunity. This is the reason why Special Purpose Acquisition Companies (SPAC) are also called “blank check companies”. This is because, investors are in essence, giving blank checks to the management to invest in an opportunity which hasn’t even been identified yet!
The proceeds received from the sale of shares of the Special Purpose Acquisition Companies (SPAC) are placed in a trust. This trust is closely monitored and the money is invested in highly secure and liquid investment. This is done so that the money can be easily drawn down when an opportunity arises. If an opportunity does not arise within a given time frame, the money is returned back to the investors after deducting fees for legal expenses and brokerage.
If the acquisition is actually made, then the investors receive shares of the acquired company. Since there is no money left in the bank accounts of the Special Purpose Acquisition Companies (SPAC) after the acquisition, its shares essentially become worthless. This is the reason that they are often delisted.
Special Purpose Acquisition Companies (SPAC) are used for several purposes. Two of the most important ones have already been listed below:
Even though, SPACs have become very popular in the past. There are a lot of issues related to SPACs as well. Some of them have been listed below:
As far as investment bankers are concerned, Special Purpose Acquisition Companies (SPAC) are good for their business. This is because, they get multiple opportunities to engage with the company.
To sum it up, Special Purpose Acquisition Companies (SPAC) are a unique and innovative method of fund raising which has been created by investment bankers.
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