This post was originally published on October 15th, 2024, and updated on June 2nd, 2025.
A Special Purpose Acquisition Company (SPAC) is a type of investment vehicle created to raise capital through an initial public offering (IPO), to acquire or merge with a private company. Unlike traditional companies, a SPAC does not conduct any commercial operations upon formation. Instead, it acts as a shell corporation, commonly established by experienced investors or executives aiming to take a promising private business public through a simplified process.
The formation of a Special Purpose Acquisition Company (SPAC) involves specific steps and structures that align the interests between sponsors and investors.
A SPAC originates with a sponsor or group of sponsors who provide the seed capital necessary for operational setup and regulatory filings. These sponsors are often prominent investment professionals or firms with a track record in deal-making. In exchange for their risk, they typically receive a 20% stake in the SPAC post-IPO, often referred to as the "promote." The public offering involves selling units that include common stock and a portion of a warrant, which gives investors the option to purchase additional shares later at a fixed price, thereby enhancing their potential upside.
After the IPO, the SPAC enters a search phase, during which it must identify a suitable merger candidate. This period usually spans 18 to 24 months. If no acquisition is completed within this timeframe, the SPAC must return the capital to public shareholders, minus any interest earned on the funds held in trust. This time-bound structure incentivizes efficient deal execution while protecting investor capital.
The proceeds raised from the public offering are placed in a secure trust or escrow account. These funds are off-limits for the SPAC’s operating costs and are reserved exclusively for completing a business combination. If the merger does not occur, the funds are returned to investors, providing a degree of financial security.
Understanding the primary role of a Special Purpose Acquisition Company (SPAC) helps clarify how it facilitates access to public markets.
The SPAC’s function starts with raising capital from the public markets. It then searches for a promising private business to merge with. Once a target is identified, the SPAC negotiates deal terms and conducts thorough due diligence. The merger terms are then disclosed to public shareholders, who vote to approve or reject the proposed transaction.
One of the core benefits of a SPAC is its ability to fast-track the public listing process for a private company. By merging with a SPAC, the target avoids the lengthy and unpredictable process of a traditional IPO. This efficiency often makes SPACs an appealing choice for growth-stage companies aiming to access capital markets quickly.
SPACs open up opportunities for public market investors to participate in deals typically reserved for venture capital or private equity. By investing in a SPAC, shareholders gain indirect access to high-growth startups or niche businesses that may otherwise remain inaccessible.
The lifecycle of a Special Purpose Acquisition Company (SPAC) consists of several stages, from formation to de-SPACing (merger completion).
The process begins with incorporation, where sponsors register the SPAC as a shell entity. The sponsors fund initial expenses and file an S-1 registration with the SEC. Once approved, the SPAC conducts an initial public offering (IPO), selling units to the public and placing the proceeds in a trust account. The IPO closes once the desired amount is raised, transitioning the SPAC into its search phase.
During the search phase, the SPAC team looks for potential merger candidates. When a suitable business opportunity is identified, the parties may enter into a letter of intent (LOI), outlining the preliminary terms of the deal. This is followed by the signing of a definitive agreement, which includes comprehensive merger terms and is filed with the SEC to inform public shareholders.
Once the definitive agreement is filed, the SPAC prepares proxy materials or a tender offer to solicit shareholder approval. Investors vote to approve or reject the merger. If approved, the business combination is executed, and the private company effectively becomes a publicly traded entity, completing the de-SPAC process.
Comparing a Special Purpose Acquisition Company (SPAC) with a traditional initial public offering (IPO) highlights key differences in structure, process, and investor experience.
Special Purpose Acquisition Companies (SPACs) offer multiple benefits to investors, sponsors, and target companies.
Private companies looking to go public can do so more quickly through a SPAC than through a traditional IPO. The process requires fewer regulatory hurdles and less reliance on market timing, enabling companies to access capital in a more controlled manner.
The valuation of the target company is negotiated between the SPAC sponsors and the target’s management team. This allows for more flexibility compared to IPO pricing, which is heavily influenced by market conditions and investor sentiment at the time of listing.
Sponsors often bring strategic value, such as industry expertise, operational guidance, and connections to potential investors or partners. A reputable sponsor can enhance the perceived credibility of the merger and improve its chances of success.
SPAC investors have the option to redeem their shares before the merger if they disagree with the proposed transaction. This redemption right provides a safety net and adds a layer of liquidity for shareholders.
Despite their advantages, Special Purpose Acquisition Companies (SPACs) carry several risks and drawbacks.
Because sponsors often receive a substantial equity stake regardless of the merger’s success, there is a risk that they may pursue deals that are not favorable to public shareholders. This misalignment of incentives can result in poor deal quality or overvaluation.
SPACs typically include features such as warrants and the sponsor's promotion, which can lead to significant dilution for ordinary shareholders. In most cases, additional PIPE financing is also used, which introduces more shares and reduces the overall value for existing investors.
Many SPACs have faced challenges in maintaining strong performance after completing their mergers. These issues often stem from overvaluation during the deal phase, operational difficulties in transitioning to public market expectations, or a mismatch between investor expectations and company fundamentals.
Regulators, particularly the SEC, have ramped up their oversight of SPAC transactions. This includes scrutiny of forward-looking financial projections, disclosure practices, and conflicts of interest. Such regulatory attention could lead to increased litigation risks and compliance costs.
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