SPACs (Special Purpose Acquisition Company)
A special purpose acquisition company is a shell company set up by investors with the purpose of raising money through an IPO to acquire another company.
A SPAC has no independent commercial operation, it doesn’t make or sell products. In fact, the SPAC’s only assets are typically the money raised in its own IPO, according to the SEC.
If you invest in a SPAC at the IPO stage, you are relying on the management team that formed the SPAC, often referred to as the sponsor(s), as the SPAC looks to acquire or combine with an operating company. That acquisition or combination is known as the initial business combination. A SPAC may identify in its IPO prospectus a specific industry or business that it will target as it seeks to combine with an operating company, but it is not obligated to pursue a target in the identified industry.
Usually a SPAC is created, or sponsored, by a team of institutional investors, Wall Street professionals from the world of private equity or hedge funds, while even high-profile CEOs. This is because when a SPAC raises money, the people buying into the IPO do not know what the eventual acquisition target company will be. Institutional investors with a track record of investing success are more easily able to persuade people to invest in the unknown. That’s also why a SPAC is also often called a “blank check company.”
Once the IPO raises capital (SPAC IPOs are usually priced at $10 a share) that money goes into an interest-bearing trust account until the SPAC’s founders or management team finds a private company looking to go public through an acquisition.
Once an acquisition is completed (with SPAC shareholders voting to approve the deal), the SPAC’s investors can either swap their shares for shares of the merged company or redeem their SPAC shares to get back their original investment, plus the interest accrued while that money was in trust. The SPAC sponsors typically get about a 20% stake in the final, merged company.
SPAC sponsors also have a deadline by which they have to find a suitable deal, typically within about two years of the IPO. Otherwise the SPAC is liquidated and investors get their money back with interest.