The Special Purpose Acquisition Companies -better known as SPACs- are companies with no commercial operations that are set up by investors for the sole purpose of raising money through an initial public offering (IPO) to eventually acquire another company.
Essentially, a special purpose acquisitions company is a shell company with no commercial operations — it makes no products and does not intend to sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO. Usually a SPAC is created, or sponsored, by a team of institutional investors, professionals from the world of private equity or hedge funds.
One of the reasons behind this -and one of the particularities of a SPAC- is that when a SPAC raises money, the people buying into the IPO do not know what the eventual acquisition target company will be. This is why institutional investors with track records of success can efficiently convince people to invest. In the case of SPACs, people are investing money based in the trust they have on the institutional investors. That’s also why a SPAC is also often called a “blank check company.”
What’s the main purpose/benefits of a cannabis SPAC?
SPACs are recently gaining popularity. In fact, they were one of the big financial stories of 2020, as they raised billions of dollars in the second half of the year. This type of company is a tool you should consider if you’re trying to enter the cannabis industry just because of the current lack of possibilities to find financing for a cannabis operation.
Among the benefits of a cannabis SPAC we find benefits for the investors and benefits for the target firms:
Benefits for the investors
- Funds in Escrow. The entire sum of money is placed into escrow, so the downside risk is practically eliminated (as it’s earning a small amount of interest while in anticipation of a merger).
- Tradable Stocks & Warrants. Investors can trade both their stocks and warrants during the interim phase while awaiting for a merger. You can use this at your advantage if you know how to play your cards correctly to produce good returns
- Time Limitations. In SPACs there’s always a time limit, forcing the SPAC team to find a target in a specified period of time. This gives the investors an assurance that if a deal is never agreed-upon between management and investors, then the initial funds are returned.
- Greater Input. A SPAC allows for greater investor input into the investments themselves. SPAC investors do not choose the deals, but they opt out of any target opportunity and receive reimbursement of funds.
Benefits for the target firms
- Quicker & Cheaper. The final goal of a SPAC is a reverse merger, and reverse mergers are nearly always cheaper and faster than IPOs and SPACs have even greater advantages than a traditional reverse merger as negotiations with underwriters are often unnecessary.
- No IPO risk of failure. The risks of failure to raise the capital through institutional investors or changing the price of the offering are all eliminated as these are done when the SPAC’s money is raised and placed for holding into the investment vehicle.
- Knowledgeable Management. In a SPAC merger, the management team will often retain at least one key person for an active role within the company or on the board as a key consultant
- No Threshold for IPO. Many companies may not qualify for an IPO in the traditional sense. In this sense, SPACs serve as a good alternative for companies with large potential growth prospects that wouldn’t normally make the cut.
- SPACs Have Cash. Unlike most other non-performing shell corporations, SPACs typically have cash which is helpful to create immediate capital appreciation and value for the target in the transaction.
- Historically There Hasn’t Been Drama Surrounding SPACs. Which saves time and money for every party involved in it.
How can you create a cannabis SPAC?
The process to start a cannabis SPAC is no different to creating a traditional IPO. As Chris Weekes, managing director in the capital markets group at the investment bank Cowen puts it: “There’s a roadshow that will incorporate one-on-one meetings between institutional investors like hedge funds and private equity funds and the SPAC’s management team” to drum up interest in the offering.
The goal is to make institutional investors buy into the offering, along with a smaller percentage of retail investors. In this sense, a SPAC boils down to being able to persuade shareholders to buy its shares.
If you need more information about the subject matter, you can always contact us and we’ll be glad to help you in your endeavor.
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