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Should I care about SPACs? What is a SPAC?

SPACs – The New Kid on The Block

By: Curt Stowers

New Kid on The Block

Capital markets are an incredible resource for businesses that are looking to grow. Going public provides companies with capital to pursue ideas that are often incredible and that would be impossible without this infusion of cash. I’m a HUGE proponent of them.

What I’m not such a huge proponent of is BUYING companies that are going public initially.

Historically Initial Public Offerings (IPOs) were the path that a vast majority of companies went down to go to market. Recently, a new option has emerged, “Special Purpose Acquisition Companies” or SPACs.

Here’s the difference: With an IPO you’re normally dealing with a company that is already established and is looking for funding for a well-defined (normally!) business idea. With a SPAC, you’re providing capital to an entity that will then decide what it wants to buy.

So essentially the SPAC says, “Give me your money and I’ll find something good to do with it.” Call me old-fashioned, but this just doesn’t sound like a good idea to me.

SPACs and IPOs - Both are Easy

The good news is that whether you are dealing with IPOs or SPACs they both are available in publicly traded markets and present minimal difficulty in purchasing.  However, remember that there is also minimal difficulty in purchasing chips at the casino—the house WANTS to make it easy for you to get in the game!

Why Buy Either?

To me, the key issue is why should/would you buy either of these? In my opinion, you should buy securities that are part of your “Investment Policy Strategy” (IPS). An IPS outlines what your goals are, what your cash flows are, what you are buying, and what you are expecting in terms of volatility and risk.

If your IPS is focused around buying new-to-market companies, then I could see purchasing IPOs or SPACs as a viable option. HOWEVER, there are not many people out there (the research would suggest pretty much zero) who have been able to choose wisely in this space.

For that reason, I prefer to craft an IPS around more developed securities.

I am NOT suggesting that you buy or don’t buy these sorts of securities— that’s a discussion for you to have with your financial advisor. I am suggesting that a well-defined strategy is normally critical to long-term success as an investor.

You can read more about IPO’s and SPACs in the attached article.

IPOs, SPACs, and Direct Listings_ All Roads Lead to Rome - f5fp

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