| No doubt you have seen the term SPACs being written about and heard it discussed in financial news reports. You may have also heard about the remarkable surge of SPACs and considered jumping on the bandwagon to make some big bucks.
So, should you invest in these special purpose acquisition companies?
It always makes sense to look before you leap. So, before you actually invest, it's important to identify the risks as well as the opportunities that exist with SPACs, which are also commonly referred to as blank check companies.
For the record, financial experts I spoke with believe that because of their high risk and poor historical returns, SPACs probably aren't a suitable investment for most individual investors. However, given the attention they have received over the last 12 to 15 months, and the increase in successful SPAC initial public offerings, things could possibly change.
For background: SPACs attracted a great deal of attention as the pandemic, and ultimately lockdowns, took hold in March 2020. With IPOs looking somewhat vulnerable amid the Covid-19 pandemic, emerging companies and venture capitalists started seeking out alternative investment solutions to bring companies public. SPACs became the hot ticket.
Now, amid this boom in SPACs the Securities and Exchange Commission announced it is considering new investor protections against the investment vehicles.
Some of the resources will be devoted to new ideas and recommendations around SPACs and how to appropriately protect retail investors who are interested in jumping into the investment.
SPACs work like this: Capital is raised in an IPO without a company attached. Then, the IPO finds a private company and merges with it to take it public, generally within two years. That means that when investors buy into a SPAC, they're hoping for the stock to surge once it's eventually merged with a company going public.
However, secondary investors, more likely the retail crowd, usually get in too late to see meaningful gains and often lose money, financial experts say.
With that said, "There are some real questions about who is benefitting and investor protection," SEC Chairman Gary Gensler said.
For more cool stuff like this, please follow me on Twitter @jimpavia and check out CNBC's Financial Advisor Hub and CNBC + Acorns Invest in You: Ready. Set. Grow. |
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