Here are some notes on Forward Purchase in Special Purpose Acquisition Company (SPAC), along with some MCQs and answers:
Forward Purchase in Special Purpose Acquisition Company (SPAC)
A forward purchase agreement in a Special Purpose Acquisition Company (SPAC) is a contract between the SPAC and a third party that commits the third party to purchase a certain number of shares of the SPAC’s common stock at a specified price, typically the IPO price of $10 per share.
How does a forward purchase agreement work?
When a SPAC goes public, it may enter into a forward purchase agreement with a third party. The third party agrees to purchase a certain number of shares of the SPAC’s common stock at a specified price, typically the IPO price of $10 per share. The forward purchase agreement is typically funded by a bank or other financial institution.
The forward purchase agreement provides the SPAC with a guaranteed source of funds to acquire a target company. The third party is typically a hedge fund or other institutional investor that is looking to profit from the SPAC’s merger with a target company.
What are the benefits of a forward purchase agreement?
A forward purchase agreement can provide a number of benefits for the SPAC.
- Guaranteed source of funds: The forward purchase agreement provides the SPAC with a guaranteed source of funds to acquire a target company. This can be helpful if the SPAC is unable to raise enough money through its IPO.
- Reduced risk: The forward purchase agreement reduces the risk of the SPAC not being able to acquire a target company. If the SPAC is unable to acquire a target company, the third party will not be required to purchase the shares of the SPAC’s common stock.
- Increased valuation: The forward purchase agreement can increase the valuation of the SPAC. This is because the forward purchase agreement indicates that there is a third party that is willing to pay $10 per share for the SPAC’s common stock.
What are the risks of a forward purchase agreement?
There are also a few risks associated with a forward purchase agreement.
- High cost: The forward purchase agreement is typically funded by a bank or other financial institution, which will charge the SPAC interest on the funds. This can increase the cost of the SPAC’s acquisition of a target company.
- Dilution: The forward purchase agreement will dilute the ownership of the SPAC’s existing shareholders. This is because the third party will be issued new shares of the SPAC’s common stock when the forward purchase agreement is exercised.
- Uncertainty: The forward purchase agreement is subject to a number of uncertainties, such as the ability of the SPAC to acquire a target company and the valuation of the target company. This can make it difficult to predict the ultimate impact of the forward purchase agreement on the SPAC’s shareholders.
MCQs on Forward Purchase in Special Purpose Acquisition Company (SPAC)
- Which of the following is NOT a benefit of a forward purchase agreement?
- Guaranteed source of funds.
- Reduced risk.
- Increased valuation.
- Dilution of existing shareholders.
- The answer is Dilution of existing shareholders. Dilution is a risk associated with a forward purchase agreement, not a benefit.
- Which of the following is a risk associated with a forward purchase agreement?
- High cost.
- Uncertainty.
- All of the above.
- None of the above.
- The answer is All of the above. High cost, uncertainty, and dilution are all risks associated with a forward purchase agreement.
Conclusion
A forward purchase agreement can be a valuable tool for a SPAC, but it is important to understand the risks involved before entering into one. Investors should carefully consider the benefits and risks of a forward purchase agreement before investing in a SPAC.