so picture this bill ackman billionaire hedge fund manager asks you to invest in his idea
you're a bit hesitant but hey it's bilakman so you want to know more about it so you ask
what's the idea to which he answers well you'll have to wait and see but it is very promising
that's sort of how sparks are and it's not just finance people that are involved it's
also athletes like serena williams rappers like jay-z and even politicians like paul
ryan what's up everyone it's kenji here and in this video i thought i'd explain what a
SPAC is so firstly we'll look at a definition of a SPAC and how it differs from a traditional
ipo secondly we'll look at why they've gotten so popular recently and lastly we'll go over
some of the concerns with SPAC so what is aspect and before we get into that i do need
to give you a bit of background so generally when a strong business is rapidly growing
there comes a point where they decide to raise a ton of money to continue with the growth
by going public basically that means that they sell their shares in the public markets
to investors so the stock market and in return they get cash for that now traditionally that
process is known as the ipo which stands for an initial public offering now this process
is both lengthy and expensive you need to hire an investment bank to help you need to
file a ton of paperwork for regulatory approval you need to pitch to investors in a road show
that you're going public so they get excited and want to buy your shares so give or take
that takes about one year of planning and another further six months for the actual
ipo process on top of that you need to pay the investment banks around 3.5 percent to
7 of the ipo proceeds not to mention all the legal accounting and other fees involved and
the management team has to go through this whole process while at the same time running
the business as they would usually so making sure the customers are happy all the stakeholders
are happy and so on and so forth so it's quite a headache for the management team so they're
all stressed out about this and that's when someone mentions spax as a way to bypass all
that red tape that goes into an ipo and here's how it works step one a famous person like
hedge fund manager bilakman and his management team known as the sponsors set up a shell
company or a spa meaning it's got nothing in it so no operation no business model no
employees nothing that's also why they're sometimes referred to as blank check companies
in that you're giving away your money blindly so step two the sponsor in this case bilakman
and his management team go out on a road show to try to get investors to put money in their
shell company that's got nothing in it but they do promise them that once we have this
money we'll invest it very wisely by acquiring a phenomenal business and all the investors
are like hmm why would i invest here so bill says well because it's me bill akhman i'm
not a billionaire for no reason my track record speaks for itself so the investors have faith
in him they say that they're interested in investing and bilakman goes ahead and files
for an ipo for that spock and the regulators are like whoa whoa hold on a second where
are you going so fast give us all your financials we need to order them so bill akman sends
them the financials but there's really nothing in it because well it's a shell company so
it had no previous operations so that whole process is super streamlined and it takes
about eight weeks because well there's just nothing to audit then once the spock ipos
and raises all the money that it needed bilakman needs to honor his side of the deal which
is to acquire a great private company now during that time that money is going to be
placed in a trust just in case something happens for security reasons and bilakman's going
to have a total of 24 months to find a company to acquire if that doesn't happen then he'll
need to return that money to all the investors so assuming bill acquan does find a company
to acquire and that acquisition is completed with no problems the publicly traded spock
then merges with the target company and becomes public in the process effectively replacing
the traditional ipo this process is also known as the sparking once the acquisition is announced
investors actually have a choice of either keeping their money invested because they
like the company that they've acquired or they can actually decide to liquidate so cash
out and get their money back in case they don't like the company that's been acquired
by the sponsor and there you go the private company that's been acquired has effectively
bypassed the whole traditional ipo process and is already trading in the market all right
now that we understand what a spark is let's look into why they've become so popular now
the funny thing about sparks is that they're not new they've been around since the 1990s
but they just had a bad reputation for scamming investors ever since the sec which is the
securities and exchange commission the main regulator in the us actually decided to step
in and regulate the market which is why in the past decade or so they've actually been
growing more and more and here's how their trajectory looks like there was hardly any
sparks in the early 2000s dropping down all the way to one spoke in 2009 but in 2020 it
began to really take off with 248 sparks and then 419 up until september 2021 and that's
actually more than the number of traditional ipos as for why they're so popular all of
a sudden to be honest nobody really knows the answer to that but the pandemic and it's
uncertainly certainly helped especially because in a traditional ipo it might take over a
year or two to actually get to trading in a stock market and by then maybe there's no
more interest in your company right on the other hand through a spark you're able to
bypass the whole process and you're able to go much faster then on the other hand there's
also the billionaire investors like what might be the case of chama palihapidia i think that's
how it's pronounced bilakman or richard branson also hopping on the ship now some of the most
renowned companies that have merged with sparks include quantum scape which creates batteries
for electric vehicles virgin orbit which launches satellites and draftkings a sports betting
operator however the biggest spark was led by bill aquin and it raised 4 billion dollars
but after some lawsuits it's still in the process of finding a company to acquire all
right let's look at some of the concerns that have been voiced with spax and when you invest
in a traditional company you can look through their business model you can see their financial
statements as that's publicly free information so you can see how much sales they've had
how much debt they're in their profits and so on and so forth but in the case of a spark
there is no such information all you really see is the famous person that's out there
trying to promote it that might be bilakman it might be or whoever else so you're really
betting on that person's ability and even though they may be remarkable people at the
end of the day it's still a blind investment another concern which was voiced by lloyd
blankfein who's the former ceo of goldman sachs is that the due diligence process is
nowhere near as rigorous as it is for a traditional ipo but where was the process and diligence
that we all associated with a rigorous ipo diligence process for example in 2019 adam
newman's wework was set for an ipo but ended up withdrawing after a growing investor concern
on the business model and its eccentric founder that was primarily due to the scrutiny of
investors looking to invest in the ipo but you fast forward to two years later and wework
is going public using a spark to bypass all that heavy due diligence process that i failed
two years prior and sure a lot has changed for wework in that two-year period whether
it be their management team or their business model but overall it's still something to
keep an eye out for oh and let's not forget about nikola the electric truck company that
went public via spock currently its founder who no longer works at the company by the
way is facing criminal charges for defrauding investors and among other things in nicola
you might remember the marketing campaign where the truck was going downhill because
it couldn't run under its own propulsion the very last concern is the incentive structure
how it usually works is the sponsor gets to buy a 20 stake called a promote at a heavy
discount usually regular shareholders pay 10 for a share but sponsors pay a nominal
price of less than 0.1 dollars for the same share it's essentially nothing that means
that if the spot raises 100 million the sponsor takes home 20.
so it's really in the sponsor's interest to find a deal as opposed to not finding anything
and having to return that money after two years when you think about it that means that
sometimes they can settle for acquiring a company that's less than ideal just to make
sure they get their big paycheck and even if that company does poorly it's still better
than having to return that money back to investors after two years having gotten nothing in return
overall as with anything else there's going to be some great players in sparks and some
very poor ones too so make sure you do your research that's all for this video if you'd
like me to explain something else in the future do let me know down in the comments and hit
that like hit that subscribe if you enjoyed it and i'll catch you in the next one