A SPAC is a Special Purpose Acquisition Company, a shell that is created for the specific purpose of merging with some private company to take that company public more quickly than could have been the case with a normal initial public offering (IPO) process.
SPAC stands for “special purpose acquisition company”.
It’s also called a “blank-check company” or “shell company.”
These shell companies go public and raise money for the sole purpose of acquiring an attractive private company with explosive upside, taking it public in the process.
Investors are betting management will deliver on its promise to find a compelling target and take it public by merger.
When a sponsor. or the management team decides to launch a SPAC, they create a holding company.
The sponsor seeks out investors by selling themselves, their deal-making experience, and a target industry in which they will search for a company to acquire.
Once it has enough interest from outside investors, the sponsor sells units in the SPAC itself. SPACs typically IPO at a price of $10 per unit.
Typically, units consist of one share and a fraction of a warrant.
The money raised goes into a blind trust. It’s untouchable until shareholders approve an acquisition.
The SPAC trades on an exchange just like any other listed stock.
SPAC sponsors have 18−24 months to get a deal done, depending on the prospectus.
Sponsors are motivated to get a deal done. They are issued around 20% of the hares outstanding at IPO.
These shares can be worth millions of dollars and are called “Founder Shares” or the “promote”. They act as compensation for finding a deal.
If sponsors fail to land a deal within the defined time period, the SPAC will dissolve, and shareholders get their money back.
Once a deal is found, and terms of the acquisition are negotiated, shareholders vote on whether to approve the deal.
If the deal is approved, the sponsor moves ahead with bringing the company public, pending the deal receives regulatory approval and the SPAC has the necessary capital to acquire the company. (Shareholders can elect to receive their money back, along with interest at this time.)
If it still needs money, sponsors will turn to private investors for a “PIPE” transaction (Private Investment in Public Equity).
High-quality firms, such as Blackrock, Fidelity, and T. Rowe Price, have been PIPE investors.
Once approved, the SPAC’s ticker changes to reflect the newly-acquired company. Shareholders who held a stake in the SPAC now hold a stake in the newly acquired company.
While they’ve been around for decades, SPACs aren’t nearly as well-known as traditional IPOs.
Traditional IPOs are for more mature companies that have private investors who are looking for exits.
SPACs, on the other hand, target companies in the earlier stages of their growth cycles. That means they have even more upside potential than IPOs.