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What Is a SPAC and Why Do Investors Like Them So Much?

2020 has certainly been the year of the SPAC. We've seen more special purpose acquisition companies, or SPACs, complete IPOs than any other type of company. In this October 29, 2020 Fool Live video clip, Fool.com contributors Matt Frankel, CFP and Asit Sharma discuss what a SPAC is and what investors should know about them.

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Matt Frankel: So before we really dive into what Boston Omaha (NASDAQ: BOMN) does and what their SPAC is intended to do. You just give listeners a brief overview of what a SPAC is?

Asit Sharma: Sure. Matt, a SPAC is a Special Purpose Acquisition Company with an emphasis on the idea of acquisition. This is a company that comes to market via an IPO that you can buy into. It is formed for the express purpose of acquiring other companies. SPACs are a type of blank check company and that makes it easier to understand for me and I get the concept. I hear SPAC and it doesn't register anything Matt but I hear blank check company and I totally get the idea. Okay. This is a company that is given some funds by investors to go out and make acquisitions. Characteristics of blank check companies, they don't have detailed business plans when they file their S1 statement prospectus before going public, they don't have any operations. One thing that I want everyone to understand here before I finish defining this is when you invest in a SPAC, this type of company that's going then acquire their companies. You're actually not investing in a business concept so much as you are in a management team that people who are bringing the idea to market. It's important to know who's offering up this back and try to get an idea of how they might perform. The company, which is going to go public via this type of vehicle, won't even have any stated acquisition targets when it goes public. If you read through one of these prospectuses and try to find out, OK, what company does this special acquisition purpose vehicle want to buy most of the time that's not disclosed in the filings but it doesn't mean that the people who are behind us back haven't already identified targets and that's critical to understand to.

Many times you will see a SPAC after it gets its funding, go straight into an acquisition. Sometimes they take several months, so it takes a little bit of time, often just to finish due diligence, for example and we might not hear about that as investors. When these companies go public, the IPO proceeds are placed into a trust account that bears interest and they have to close the deal within two years. If a SPAC doesn't identify and go through with an acquisition of that time frame, it's supposed to be liquidated, although there are certain ways you can extend that but in general, once investors put their money and the expectation is that the management team of this back is going to go ahead and start acquiring companies so we'll get into some more specifics together on why on earth anyone would want to invest in something like this. I think there have been some successes this year and some not so great us facts have come out. So just flip it back to you, Matt but that's a general overview explanation of what a SPAC is.

Matt Frankel: Yes. Apparently some people do want to put money into these, because just a run through a couple of statistics. In the third quarter alone, 77 SPACs went public. That's 40 percent of all IPOs that we saw in the third quarter through mid-September SPACs have raised over $31 billion on the public market and I was just looking at my TD Ameritrade account. Three are going public today two more are going public tomorrow. So this is a continuous fundraising vehicle like you said, there have been some really notable examples. The one that I always give is Virgin Galactic (NYSE: SPCE), which went public to risk back open door that real estate start-up is about to go public through a SPAC. There are a bunch of really good examples of where this has worked out.

Asit Sharma: Exactly. Yeah.

Matt Frankel: In electric cars recently there was just one.

Asit Sharma: Then Nikola (NASDAQ: NKLA) is one. [OVERLAPPING] It's been little up and down. But yes, there have been some really successful ones and I was curious, we didn't discuss this when we were chatting before this segment. Haven't been able to glean exactly why they suddenly become as popular this year. They come in cyclical waves that are sometimes tied to the economy. Any insight by any chance on why they're so popular since the middle of this year.

Matt Frankel: It's a combination of a few things, I think. One, there's just been a big wave of IPOs in general.

Asit Sharma: Sure.

Matt Frankel: Companies are looking for ways to go public and there are basically three ways you can go public. You can do it a traditional IPO. You can do what's called a directly list your shares on an exchange, which cuts out some of the costs associated with IPOs but the downside is you don't raise any additional capital when you do a direct listening. Slack is a great example of one that went public are a direct listening. Or the third way you can IPO is through by being acquired by one of these SPACs. So what happens in that case, the SPAC will acquire a company. The company will get the funding that the SPAC has. So if the SPAC rate is $200 million, it gives it an injection of money and without the cost and regulatory issues, a lot of them that are associated with our traditional IPO. It's the path of least resistance to going public while still being able to raise some capital. Is my opinion on that. Someone just asked what is the ticker for Boston, Omaha, and their SPAC and we're going to get into the company in a second but because I'm really bad about saying tickers on the air. Let me go ahead. The ticker for Boston Omaha is BOMN and their SPAC is called Yellowstone Acquisition Corp. and the ticker is YSACU, when stacks IPO, they generally IPO in what they call units. Unit of a SPAC, which is what you would buy Boston, Omaha and SPAC consists of one common share and then a warrant to buy or a portion of a warrant to buy another share at a predetermined price at a later date. So think of it as you are getting a combination of stock and options when you're buying into a stack. At some point, I'd want to say it's 52 days after going public. The stack will start trading separately in terms of shares and warrants but for the time being, you will purchase a unit of the SPAC, which gives you not only a share, but the right to buy an additional half share in Boston Omaha's case. At anytime within five years, which could have tremendous upside.

Asit Sharma: Sure. Absolutely. We should mention too that for those of you who aren't as familiar with warrants when you exercise the warrant, if you hold the unit, that's money that goes back into the company's coffers. So unlike when options are traded or exercised, those are transactions between two parties, but the company gets the proceeds when you decide to exercise that warrant and pay whatever, call it strike price. I don't think that's the right terminology for the warrant, but when you when you exercise the warrant.

Matt Frankel: Right, if the company is doing well to the point where people want to exercise these warrants. It can give them a nice little capital injection gradually as they go.

Asit Sharma has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Boston Omaha. The Motley Fool owns shares of and recommends Boston Omaha and Virgin Galactic Holdings Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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