SPACs (aka "blind pool" or "blank check" companies) are shell companies that raise capital through an initial public offering (IPO) to acquire an existing private company. The acquired company then becomes publicly traded as a result of the merger. SPACs have a limited time frame, usually 18-24 months, to complete an acquisition, or they must return the funds to investors.
What is the primary purpose of a Special Purpose Acquisition Company (SPAC)?
Not Correct
Correct!
Select an option above to see an explanation here.
A) Incorrect, as the specific private company is not identified before the IPO. B) Correct, as the primary purpose of a SPAC is to acquire a private company through an IPO. C) Incorrect, as SPACs are not involved in trading derivatives. D) Incorrect, as SPACs do not manage portfolios of stocks.
What happens if a SPAC does not complete an acquisition within the specified time frame?
A) Incorrect, as the time frame cannot be extended indefinitely. B) Correct, as the SPAC must return the funds to investors and dissolve if an acquisition is not completed within the specified time frame. C) Incorrect, as the funds must be used for the intended acquisition. D) Incorrect, as the SPAC cannot convert into a traditional IPO.
Which of the following is NOT a similarity between a SPAC and a reverse merger?
A) Incorrect, as both SPACs and reverse mergers involve acquiring a private company. B) Incorrect, as both SPACs and reverse mergers result in the private company becoming publicly traded. C) Correct, as only SPACs raise new capital through an IPO, while reverse mergers do not. D) Incorrect, as both SPACs and reverse mergers involve a shell company.
In the early 2000s, SPACs gained popularity as an alternative to traditional IPOs, with several high-profile acquisitions. One such acquisition involved a SPAC raising $200 million in an IPO and successfully acquiring a private technology company within the specified time frame. This transaction was widely covered in major newspapers and helped to establish SPACs as a viable option for private companies to go public.
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Example Series 65 Example Practice Question
A well-known investment firm forms a SPAC and raises $300 million in an IPO. The SPAC identifies a promising private healthcare company as a potential acquisition target. After negotiating the terms of the deal, the SPAC acquires the healthcare company, and the combined entity becomes publicly traded. As a result, the healthcare company can now access public markets for funding and growth opportunities.
A SPAC is a shell, with funds to dispense, they find a private company, and merge to commence.