what are SPAC issues, really, and why are they special?

The year 2021 was characterized by a huge wave of initial public offerings.

What is a public offering?
A public offering is a share offer of a private company to the general public in exchange for money. This is actually raising public funds for the company to use in order to achieve growth in its profits. The purchasers of the shares from the public become "investors from the public."

When a company makes a profit its value goes up, and so its shares are worth more shekels or dollars. In this way, investors benefit.

The company issued on the stock exchange in this way, becomes from a private company to a public company. Its HF number changes, and such and such extended legal obligations begin to apply to it.

A public offering is called Initial Public Offering, or IPO for short.

In order for a company to issue itself, it is necessary to meet basic threshold conditions such as equity of a certain size, and in addition it is necessary to go through a complex process of working with the Securities Authority that will give permission to publish a prospectus. A "prospectus" is a very long legal and accounting document - between hundreds and thousands of pages - that describes the company, the industry in which it does business, the competitors of the business, the risks of the business, the financial situation of the business, the assets of the business, the forecast For growth in profits, and in fact anything a reasonable investor will need to make an informed decision whether to invest in a company or not.

Do investors read 1,000 pages or more?
Probably not. Sophisticated investors know how to look for exactly the relevant headlines and pages according to the table of contents, and focus precisely on the most important information for the purpose of deciding whether to invest or not.

Can there be misleading details or omissions in the prospectus?
Certainly yes, but including misleading details or omitting details are criminal offenses which may at the same time give investors who have lost money the right to file and win a class action lawsuit against the company.

SPAC issues ("SPAC")
The abbreviation SPAC is a Special Purpose Acquisition Company, and in Hebrew: "a company for a special purpose that is an acquisition (of another company)".

This is a "bypass path" to the IPO. Since the corporate structure is a bit complex, we will detail it in the sections.

1. An empty company is established by a person who has a good reputation in the financial community of a person who is able to find excellent investments that have the potential to double the initial investment by hundreds or thousands of percent. This person will run the company.

The name of the company in our example will be Spock Investments Ltd.

The name of the principal in our example will be Joel Graham.

2. Spak Investments Ltd. brings in funds from the public, through the issuance of its shares on the stock exchange.

The Securities Authority approves the prospectus. The fundraising is done and the money goes in.

Mr. Joel Graham, CEO of Spock Investments Ltd., begins looking for a private company that meets the criteria for investing in it. Joel Graham finds such a private company, named Doodle Ltd.

Joel is negotiating with Doodle Ltd. for its acquisition. As stated, Spock Investments Ltd. is a public company that is traded on the stock exchange, and Doodle Ltd. is a private company that is not traded on the stock exchange. At the end of the negotiations the two companies merge, the private company receives the money and becomes public.

The end result of the SPAC merger
Spock Investments Ltd. has disappeared.

Doodle Ltd. has become a public company, its shares are traded on the stock exchange.

Spock Investments Ltd.'s cash register is transferred to Doodle Ltd.

In the event that Mr. Joel Graham fails to find a suitable company to purchase within a period of one and a half to two years from the date of raising, the raising funds are returned to investors.

Why is an IPAC offering good for the private company?
The reason is that the private company is not required to go through the entire legal and accounting process of writing a prospectus and approving it, for all the costs involved. In addition, the private company has no risk of the IPO failing - after all, the IPO has already been carried out by the SPAC company and the money is waiting for the private company to be picked from the tree. Even the amount of money is known in advance to the private company.

Is it worth investing in SPAC?
In such an investment in the company through SPAC, the investor buys shares solely on the basis of the reputation of the manager. In other words, an investor who invested in SPAC in this way ignored the profitability of the acquired company, its financial position, the forecast for its profit growth for the coming years, the risk factors for investing in it and more - all because the acquired company's identity was unknown at the time of investment.

Therefore, investing in SPAC is a completely speculative step. As clear as this point is, an investor is allowed to gamble with his money on anything, but keep in mind that this investment does not fall within the definition of a safe investment.