What Is a SPAC? How SPAC Process Works

A SPAC (special purpose acquisition company) is a shell company that allows private companies to go public. SPACs, also known as blank check companies, do not have their own commercial operations; instead, they form to raise capital through an initial public offering (IPO). These companies may use IPO funds to form a SPAC merger, in which they acquire or merge with an existing target company.

SPAC investors have become increasingly common. The SPAC structure allows buyers and target companies to negotiate deals with greater reliability. IPO proceeds can be lucrative and offer easier liquidation, making SPAC shares a popular purchase for institutional investors.

SPACs typically form when investors with a shared area of expertise come together to invest in a target company. These shell companies will look into companies considering going public and will buy shares ahead of the IPO. SPACs do not identify target companies to avoid disclosures during the IPO process. SPAC IPOs can move quickly, giving the target company a chance to go public sooner and set a better stock price rate with the SPAC to have money in the bank.

SPAC sponsors will keep an eye on companies (sometimes startups) and do their due diligence to research the potential company and its IPO price. Typically, SPAC sponsors have an area of expertise and research operating companies in that sector, seeing which ones are strong candidates based on stock prices, NASDAQ trends, and market volatility.

SPACs will complete the necessary legal filings for an IPO. SPAC shareholders give IPO investors little context before investing, seeking underwriters and institutional investors before offering shares to the public. Funds raised following the IPO process go into an interest-bearing trust account. Then, the SPAC has two years to complete a deal or face liquidation; sometimes, the accruing interest can operate as the SPAC’s working capital. After a SPAC acquisition, the SPAC is listed on a major stock exchange, such as the NYSE.

Consider the following advantages for SPAC companies and acquisition targets:

1. 1. Accelerate IPO: SPACs help expedite the traditional IPO process life cycle for companies going public. Without a SPAC, listing a public IPO for the operating business can take over a year; when SPACs buy those share prices, it can take only a couple of months.
2. 2. High valuation: Since celebrities and the business elite lead many SPAC management teams, target companies enjoy the fame of being associated with these brands, giving them greater credence in capital markets and perhaps even a higher valuation.
3. 3. Premium price: Because of interest in the target company, it can set a premium price for shares that may be higher than shares of common stock.

SPAC business combinations offer fewer protections, regulations, and involvement when working with external investors.

1. 1. Higher risk: There is more risk than investing in a name-brand company with a historical context and brand recognition.
2. 2. Less regulation: Investors coming along have to trust that SPAC leaders have made a wise investment in the given IPO. Because this work is outside public purview, there is less regulatory oversight and structure.
3. 3. Low ROI: Return on investment can sometimes be slower depending on how the new target company performs.

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