SPAC Definition
A Special Purpose Acquisition Company (SPAC) is a type of investment fund that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are structured and publicly listed with an aim to acquire an existing company. Also commonly known as “blank check companies”, SPACs have been around for decades. In recent years, they’ve become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money.
SPAC Key Points
- SPACs are publicly traded investment vehicles formed to raise capital to acquire a private company, taking it public in a non-traditional manner.
- Considered as a “blank check” company, SPACs are initially shell companies with no operations of their own.
- Investors in SPACs or blank check companies don’t know what their money will be used for, hence the term “blank check.”
- SPACs have become an attractive option for companies to go public because of shorter process and perceived regulatory ease.
- They offer a more predictable valuation to the company getting acquired or merged.
What is SPAC?
SPAC, Special Purpose Acquisition Company, is essentially a shell corporation designed to take companies public without going through the traditional IPO process. Instead, SPACs are pre-funded with investor cash and public from the start. The money from investors is placed in an interest-bearing trust account until the SPAC’s management team finds a company to buy. If the SPAC fails to merge with a private company within the agreed timeframe, generally within two years, it will be liquidated, and the funds will be returned to the shareholders.
Why does SPAC exist?
SPACs exist as a faster and potentially less risky alternative to the traditional Initial Public Offering (IPO) process for companies. By merging with a SPAC, a private company can become publicly traded and obtain financing quicker than if it were to pivotal on the exhaustive IPO route. SPACs provide companies with a more predictive, pre-determined company valuation, avoiding the risk of a “bad IPO day.”
Who uses SPAC?
SPACs are employed by institutional investors, private equity firms, and corporate investors. They present an appealing option to private companies seeking to go public without undergoing a traditional IPO. SPACs have been used to take a vast array of companies public across numerous sectors, from electric vehicle companies to sports betting companies. Prominent entrepreneurs and investors back many SPACs.
Where are SPACs located?
SPACs are predominantly a U.S. phenomenon, listed on major U.S. stock exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ. However, their popularity is beginning to spread globally, notably in emerging markets where companies are seeking new ways to attract international investors.
How does SPAC work?
SPACs are formed by a group of seasoned individuals with significant industry experience – also known as SPAC’s sponsor or management team. They raise capital through an IPO and then identify a private company to merge with, effectively allowing the target company to go public. The money raised is stored in a trust until a merger is found. If a deal isn’t reached within a specified period, usually 18-24 months, the SPAC must return the funds to the investors.
