SPACs and Reverse Mergers

Hey everybody how are ya?

I’d love to hear from you on my YouTube channel! It’s a great place to learn and interact, so if you get a sec, go check it out.

In other news, today we’re going to dive into SPACs and Reverse Mergers.

This is one of the biggest trends we’ve observed on Wall Street from the last several years.

A Special Purpose Acquisition Company – or SPAC for short – is essentially a public pool of money.

As a rule of thumb SPACs are typically for later stage PE firms that are looking to take companies public.

Let’s talk about a couple of the different routes that a company can take to go public.

Going Public

There are THREE primary ways that a company can go public.

First, an Initial Public Offering – or IPO.

IPOs are definitely the most common and traditional path that organizations will take.

This is where an investment bank will do most of the heavy lifting by completing the company’s underwriting and charge a fee somewhere between 1-7% to benefit off of the public offering.

The second method is a Direct Listing

This is much rarer than an IPO and is mostly reserved for companies with a lot of goodwill and brand recognition.

The business will go public without having an investment banks assistance and guidance in the process, which is why if you’re a little guy this move doesn’t make a ton of sense.

However, take an example like Spotify, who did this just a couple of years ago.

They had the massive following already in place and verbal commitments from enough people and groups that they could do a direct listing with confidence.

And so far it’s gone great for them.

The third method is through a SPAC.

So SPACs have actually been around for a while, but they have just recently started gaining a lot of traction and popularity in the investment space.

As I stated earlier, a SPAC is basically a pool of money where investors have allocated their capital and then put it through the IPO process.

This pool of money operates as a as a public company and will be used to acquire businesses, merge with them, and therefore take a private organization public.

SPACs typically have a two year timeframe to acquire a company for this purpose.

If that amount of time goes by and there was no acquisition by the SPAC – the money must be returned to the investors.

However, if you’re following along here you’ll quickly realize that there really isn’t much to a SPAC when it’s created, in fact it’s truly just a shell company.

So why are investors putting any money into SPACs?

Well, mostly because they’re betting on the jockey.

They have confidence that the individuals behind the SPAC will achieve their predetermined goals.

A sort of hybrid SPAC is what we call a Reverse Merger.

This is when a specific organization wants to go public and creates a SPAC with the purpose of acquiring their own company to go rapidly go from private to public.

So the primary difference between a SPAC and a Reverse Merger is simply that a reverse merger already knows exactly what company the investors money will be used to acquire and help it go public.

Whereas a SPAC has substantially more freedom and flexibility to select a company within that two year timeframe.

A good example of a reverse merger would be Vivint Smart Home. They created a SPAC that had already predetermined that it would “merge” with Vivint and take the company public.

It’s similar to a direct listing, and the advantage here versus the traditional IPO is TIME.

When you go through an IPO market volatility has to be a consideration because it can take over a year to complete the process.

Whereas something like a Reverse Merger could do the same process in as little as 30 days.

So if the market is up and the company is currently thriving you can see the appeal of something like this.

Redemptions and Warrants

Due to the unique conditions under which a SPAC is formed (by unique I mean they have no assets) there are a couple of protections and incentives that you can put in place for your investors.

A redemption in a SPAC is basically an agreement that you (as the fund/spac manager) and an investor come to saying something like, “if you don’t like the company that I present to you I will allow you to withdraw your original investment. No fees, no catch, no nothing.”

That essentially makes this venture risk free for a potential investor.

On the flip side, SPACs will often lose money at a rapid rate once they’ve made their acquisition because investors are no longer incentivized to remain in.

That’s where warrants come in to play.

A warrant basically gives an investor an insider advantage with the future company.

Meaning they can buy stocks, assets, or positions at a reduced price from what others are being offered, with the condition that they keep their money in the SPAC for a set amount of time.


Wow! That was intense, but SPACs are awesome.

They really are rising in popularity and some investment banks fear that without a change in regulations they could lose a ton of their power to these SPACs.

I hope this helpful and that you have a good idea of how these things work now, and maybe it’ll even incentivize you to consider launching your own SPAC.

Have a great weekend guys!

All the best,

Bridger Pennington

Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.

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