SPAC 101 · Question 1 of 6
What are SPACs?
Money looking for a company. Start with the idea, the sponsor and the deadline.
A SPAC, or special purpose acquisition company, is a publicly listed shell company. It raises money through an IPO before it has an operating business. The sponsor then looks for a business to acquire or merge with. If the deal closes, the combined company carries on the target’s business as a public company. This transaction is often called a de-SPAC.
Is it like an IPO in reverse?
It is a useful comparison, as long as you keep the order straight. In a traditional IPO, an operating company raises money and becomes public. A SPAC raises the money first, then searches for a business. At the IPO stage, you are backing the search and the sponsor rather than a company that has already been chosen.
Who starts a SPAC?
A sponsor forms the SPAC and pays its early expenses. Sponsors often have investing or operating experience in a particular sector and plan to search there. The prospectus may describe that focus without making it a firm restriction. Read the actual terms to see what the team is allowed to buy.
What happens to the money while they search?
Most of the net IPO proceeds usually go into a trust or escrow account. The money may be held in cash or invested as the offering documents permit, often in short-term US government securities or qualifying money-market funds. Many SPACs start with about two years to complete a deal, but the period can be shorter or longer. Extensions may push the deadline out again, so check the latest filing rather than relying on the IPO date.
If no deal closes by the applicable deadline, the SPAC generally liquidates. Holders of eligible public shares receive their pro rata portion of the available trust or escrow balance, while warrants and rights generally expire worthless. If the deal closes, investors who keep their shares become owners of the combined operating company. The SPAC redemption exit is no longer available after closing.
Why does the sponsor want a deal?
Sponsors usually receive founder equity on far more favorable terms than public investors. That stake may become valuable if a deal closes and may be worthless if the SPAC liquidates. A sponsor can therefore have a strong reason to complete a transaction even when public investors would prefer a better deal or no deal at all.
Liking the sponsor is only a starting point. Ask which security you are buying and what happens to it if the deal never closes.