What is a SPAC? 4 crypto companies using SPACs

What is a SPAC?

A special purpose acquisition company (SPAC) is a shell company that focuses on raising money via an IPO (Initial Public Offering). Then the capital is used to acquire and merge other companies into the SPAC. In fact, it has no real products and business operations. It only serves the purpose of launching an IPO. In other words, a company can go public without IPO when it is acquired by a SPAC.

An IPO (Initial Public Offering) is a sale of a private company’s shares where institutional investors or retail ones can purchase shares. Via representative SPACs, small companies or businesses can go public in an indirect way instead of going public. They prefer this solution because it is way faster to access the U.S. stock market.

The SPAC IPO has been around the market since the 1990s. However, the surge in popularity grew more back in 2021.

The data of the chart shows that SPACs were skyrocketing in 2020 and 2021 in terms of number and fundraised. The number of SPAC IPOs has made an upward spike in the Covid-era. In addition, the total fund raised almost doubled after 2020.

Furthermore, SPACs are not only in the U.S but also in financial markets of other countries in Europe or Asia.

How does a SPAC work?

Every U.S.-based entity can create a SPAC to raise capital via an IPO. It is so appealing that many institutional-level investors, organizations, and billionaires can not resist jumping into the SPAC trend. As mentioned, the goal of SPACs is to act as a gateway to launch IPOs for companies.

There are some key points in the deal with SPACs:

• During the IPO process, SPACs are not allowed to reveal the name of the companies.
• A SPAC will be stopped acquiring or merging if it is not able to do so for years.
• Shares of IPOs going through SPACs are often traded at $10.

In Q2 2022, the SEC was proposing a set of rules focusing on stabilizing the SPAC landscape. The put-out-the-fire action from the SEC is reasonable since SPACs often create overhyped traction. The goal is to protect investors from potential losses and low-level returns.

Pros and Cons of listing via SPAC

Benefits of listing via SPAC

• Faster speed: Launching a traditional IPO can take tons of time fulfilling regulatory requirements while going via SPACs is a much faster solution for companies. Especially the process was far longer during the Covid-19 pandemic.
• Valuated before listing: A SPAC acquires a company with a deal at an agreed valuation. Therefore, the valuation of the company is predetermined when going public via the SPAC, benefiting the company. After listing, the stock price will be decided by the market, depending on many factors.

Risks of listing via SPAC

• Uncertainty after listing: The company’s initial valuation given by the deal with the SPAC can be overvalued after listing. Going public on exchanges often draws countless eyeballs for the company. Investors buy the overvalued shares, which might lead to losses. In addition, if the overvalued company does not work as expected, investors will undoubtedly take hits.
• Not going through scrutiny: Despite the speed, a company going through a SPAC have to provide files to the SEC. If there is trouble in the process, it will be under the SEC's radar in order to protect investors.

Crypto companies using SPACs

Coinbase is the first crypto company to go public in the U.S market, but it eschewed an IPO and launched a direct listing on NYSE. It was a remarkable milestone for not only Coinbase but also the crypto market since it was the first to be tradable on a U.S-based stock exchange.

After the first, there will come the laters. Besides direct listings, crypto firms can choose other two options to go public which are to launch an IPO or to be acquired by a SPAC. At the time of writing, there are several crypto firms that already used SPACs as the fastest gateway to have their stock traded on stock exchanges.

Let’s discover some popular SPAC IPOs.

Crypto firm Bullish

Crypto firm Bullish got an allowance to go public from the NYSE after a $9B merger with a SPAC named Far Peak Acquisition (FPAC.N). The goal of Bullish is to launch a cryptocurrency exchange to compete with other exchanges such as Coinbase that previously went public.

However, the $9B valuation of Bullish was said to be overvalued by Sam Bankman-Fried, the CEO of FTX exchange on Twitter. He thought $6B in crypto of Bullish was not worth $3B added to the valuation. This created a controversial discussion among the community about the valuation of each company that wanted to go public via SPACs.

Bakkt

Baktt, a digital asset marketplace, is another crypto name that went public on NYSE in October 2021 through a SPAC named VPC Impact Acquisition Holdings. Akin to Bullish, the community raised concerns about the $2B valuation of Bakkt since it only provided the estimated performance numbers in the future (or more specifically 2025).

Blockchain Payment Company Roxe

Roxe is a blockchain-based payment company that wants to go public via a $3.6B SPAC deal with a shell company (blank check company) called Goldenstone Acquisition Ltd (GDST.O). In Jun 22nd, 2022, the deal happened at a time when the crypto market was in bearish movements.

Stablecoin issuing company Circle

In February 2022, Circle had a $9B deal with a SPAC named Concord Acquisition Corp (CND.N). First, Circle was a private company that focused on issuing stablecoins such as USD Coin (USDC) which is now having tens of billions in supply. Next, the company wants to dominate the stablecoin market, in which there are strong players such as Tether (USDT) and Binance USD (BUSD).

Circle’s IPO via a SPAC was a strategic movement to overtake the stablecoin market. Its nearest target is to overcome Tether (USDT) by market capitalization. The CTO of Tether, Paolo Ardoino, has stated that Tether was not considering an IPO. Therefore, being a public company creates a sharp edge for Circle.

Read more about Circle and USD Coin: What is USDC?

SPACs vs traditional IPOs

Without a doubt, going through SPACs is a faster shortcut for companies than filing to launch an IPO. Especially, crypto companies love taking this route because some regulations for crypto are still under consideration. Let’s compare SPACs vs. IPOs to see why SPACs were dominating the IPO landscape in 2020 - 2021.

As shown in the comparison table, SPAC and IPO have some major differences in the way they work. However, depending on the demands of the company, it can choose either SPAC or IPO to go public. Since the crypto market is still receiving tons of careful actions by governments to go on the same line as traditional markets, let’s see how SPACs will impact the crypto market.

How do SPACs affect crypto?

All eligible companies can go public via SPACs, creating a SPAC surge across the markets in 2020-2021. As mentioned above there are crypto companies that follow the path of Coinbase to go public. Do SPACs have positive impacts on crypto?

Crypto companies’ valuations by SPACs before going public

The acquisition deal between a SPAC and a company can have positive or negative effects. The valuation can act as the reference for investors to understand the size of the company. By contrast, it can be overvalued to create false hype among investors, which might lead to investment losses.

A step closer to mass adoption

Some crypto companies go public without launching tokens. Designing tokenomics is a hard work since it gives no guarantee of success. Launching an IPO is an alternative way to raise capital via shares. The more crypto companies go public, the closer to mass adoption we are.

A moat for the company

Going public or not will tell a lot about the company and its future. Monitoring the performance of public crypto companies can give us a reflection on how the market reacts to these companies. For example, Circle (USDC issuer) goes mainstream to grow more in popularity while Tether (USDT issuer) remains steady to the Circle action.

FAQs about SPACs

Are SPACs good investments?

In fact, SPACs have no commercial operations but they have acquired and merged companies that need to go public as the service. Banks and institutional organizations have been actively creating SPACs recently thanks to the fast-growing financial markets.

However, as retail investors, the access to invest in SPACs is often not at hand. We can invest in stock indexes of public companies that are acquired by SPACs. Last but not least, we should consider carefully and be responsible for our investments.

Is SPAC safe and legit?

In the U.S, SPACs are legally regulated by the SEC (U.S. Securities and Exchange Commission). Therefore, companies that go public via SPACs are also under the SEC radar and they are public companies. In other countries, the SPAC model is popular but SPACs in the U.S. have been growing in popularity among investors.

Why do companies go public through SPACs and not an IPO?

Joining SPACs is a faster way to go public than directly filing to launch a traditional IPO. Although SPACs going public takes a longer period of time (about 2 - 3 years), their acquired companies can go public indirectly via the shell of SPACs.