Advantages and Risk Analysis of SPAC Listing Model

Judging from the theoretical and practical experience of SPAC listing in the United States, the SPAC listing model can bring unprecedented advantages to all parties involved in the transaction, but it also brings a certain degree of potential risks to investors.

(1) Analysis of the advantages of SPAC listing

First, for the target company, the SPAC provides a favorable way to raise funds without the need for its own IPO. Since the SPAC has been listed, as long as the target company reaches an M&A agreement with it, the listing goal can be achieved through a reverse takeover. It saves a lot of listing time and listing costs for the target company, which is very suitable for small and medium-sized enterprises to raise funds. And compared with the traditional backdoor listing, SPAC has no business plan and substantive business, and only takes merger as its only plan, so there will be no liabilities and related legal disputes, and the shell resources are very "clean", which is easy to pass regulatory approval.

Second, for the management team, SPACs provide a new profit model, which is ideal for managers who have operating experience and do not have a business for the time being. Although managers of SPACs generally do not receive wages, they do not have to pay costs. The management's insurance, legal, accounting service expenses, negotiation, office and other expenses are all included in the "company operating costs", which are paid by the funds raised by the SPAC. And since managers often hold a certain amount of SPAC shares, if the transaction is successful, the combined company's share price is likely to rise sharply, bringing huge potential benefits to the management team.

Finally, for investors, SPACs provide a way to participate in private equity without investing a lot of money. If the transaction is successful, the investor may obtain the shares of the company listed on the main board and thus make a profit; if the transaction fails, the investor's investment principal will be returned within 24 months, and the interest of the corresponding period will be obtained, and the investment risk is relatively high. small.

(2) Risk analysis of SPAC listing

While SPAC listings offer significant cost savings, like other listing models, they remain a high-risk stock market transaction for investors. In the process of SPAC fundraising, due to the lack of a business plan, investors’ investment firms are like choosing a blind box. They cannot know when the company will complete the merger, and they cannot know in advance the future mergers and acquisitions companies. Any information, so they can only hope that the SPAC management has the expertise, this investment behavior is essentially like a gamble on whether management can make sound business judgment.

It is very likely that management will try to bring about a bad deal from the perspective of maximizing its own interests. Jay Ritter, a professor of finance at the University of Florida, once pointed out: "Because of the existence of the transaction deadline, management has every incentive to make the transaction complete. , because if the deal doesn’t go through, the SPAC will return the money raised, and if it does, they could potentially reap huge potential gains.”

Therefore, in the face of the incentive of potential benefits, in order to complete the merger within a fixed period, the management may complete the merger at an unreasonable price, thereby harming the interests of investors.

If the transaction fails, the investment fee and the interest generated during the corresponding period will be returned to the consumer, which is an investor protection mechanism that can minimize investor losses. However, the negotiation, office and other operating costs paid by the management in this process will be removed from consumer investment. 18 to 24 months is not a short time, and this process will greatly waste the opportunity cost of investors.