What is a SPAC? | How to Seize Investment Opportunities in Unlisted Companies

[Stocks/Quantitative Investing] SPAC Analysis

The public offering market has been considered a difficult area for ordinary investors to access. Recently, however, interest has grown in a new investment channel: SPACs (Special Purpose Acquisition Companies). SPACs provide an opportunity to invest in unlisted companies by bypassing the complex traditional IPO process, and it's crucial to clearly understand their structure, pros, and cons. In this post, we will deeply analyze everything from the basic concept of a SPAC to how it works and common investment methods.

What is a SPAC? | New Opportunities and Risks in IPO Investing

1. Basic Concept of a SPAC

SPAC stands for Special Purpose Acquisition Company. A SPAC is, as the name suggests, 'a company established for a specific purpose,' and that purpose is only one: to acquire or merge with an unlisted company to list it through a reverse merger.

The core of a SPAC can be summarized as follows:

• Fundraising: First, a SPAC raises capital from public investors through a public offering. At this time, investors purchase SPAC shares.
• Finding an Unlisted Company: The SPAC searches for a promising unlisted company based on the funds it has raised.
• Mergers and Acquisitions (M&A): Once a suitable company is found, a merger is initiated. If this process is successfully completed, the SPAC is dissolved, and the merged unlisted company acquires the status of a listed company.
• Capital Refund: If the SPAC fails to find a merger target within a certain period (usually 3 years), it is dissolved and returns the principal and interest to its investors.

Due to this structure, a SPAC offers investors the advantage of having a low risk of principal loss. However, the opportunity for share price appreciation occurs only after a successful merger, so analyzing the potential of the merger target company is the most important investment point.

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2. SPAC vs. Regular IPO

To understand SPAC investment, it is essential to clearly know the differences between traditional Initial Public Offerings (IPOs) and SPACs.

Category	SPAC	Regular IPO
Listing Entity	Shell Company	Actual Operating Company
Investment Timing	Before the merger target is decided	A specific company decided right before listing
Price Volatility	Stable after listing and before merger	High possibility of sharp fluctuations right after listing
Risk Factors	Principal is returned if merger fails (Relatively low risk)	Possibility of error in determining the offering price (Volatility risk)

Advantages of SPACs:
SPAC stock prices tend not to fall significantly below the offering price before a merger. This is because the principal is guaranteed in case the merger falls through, providing psychological stability to investors.

Disadvantages of SPACs:
However, a SPAC is an investment in an 'uncertain future' as the merger target hasn't been determined, making it difficult to select a successful merger company. You should also be aware that you could incur significant losses if the stock price drops after the merger.

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3. Key Considerations for Investing in a SPAC

For a successful SPAC investment, you shouldn't just approach it based on the 'principal guarantee.' Some important considerations are as follows:

• 1. SPAC Management and Sponsors: The success of a SPAC ultimately depends on how well it finds and successfully merges with a target company. Therefore, it is important to check the past performance and expertise of the securities firm or sponsor managing the SPAC.
• 2. Potential of the Merger Target Company: The increase in a SPAC's stock price is determined by the value of the merger target company after the merger announcement. Therefore, once the merger target is decided, you must carefully analyze the company's business model, financial status, and growth potential.
• 3. Merger Scenario and Schedule: A SPAC merger goes through a complex process, and the merger may be delayed or fail. It is necessary to carefully review the publicly disclosed merger scenario and schedule and check for any unexpected variables.

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4. In Conclusion: A SPAC is a Financial Product, Too

A SPAC is an interesting financial product that offers new opportunities to investors. However, its essence is to invest in future uncertainty, so an objective analysis and cautious approach are needed rather than vague expectations. Like regular stock investing, SPAC investment also requires a keen eye for assessing a company's potential and reading market trends.

Key Summary:
A SPAC (Special Purpose Acquisition Company) is a shell company that merges with and lists an unlisted company. It has the advantage of a low risk of principal loss, but it is important to analyze the potential of the merger target.

The content of this blog is for reference for investment decisions only, and investment decisions should be made at the individual's own discretion and responsibility. Under no circumstances can the information in this blog be used as legal evidence for investment outcomes.