In simple terms, a Special Purpose Acquisition Company (SPAC) raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company. Subsequently, an operating company can merge with (or be acquired by) the publicly traded SPAC and become a listed company in lieu of executing its own IPO. This is why so many SPACs are being created in today’s business climate. The entire SPAC merger process with a target company seeking to be acquired may be completed in as little as three to four months, which is substantially shorter than a typical traditional IPO timeline.

SPACs have become a popular vehicle for various transactions, including transitioning a company from a private company to a publicly traded company. Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional initial public offerings, or IPOs.

These types of transactions, most commonly where a SPAC acquires or merges with a private company, occur after, often many months or more than a year after, the SPAC has completed its own IPO. Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public. This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO.

If you invest in a SPAC at the IPO stage, you are relying on the management team that formed the SPAC, often referred to as the sponsor(s), as the SPAC looks to acquire or combine with an operating company. A SPAC may identify in its IPO prospectus a specific industry or business that it will target as it seeks to combine with an operating company, but it is not obligated to pursue a target in the identified industry.

Once the SPAC has identified an initial business combination opportunity, its management negotiates with the operating company and, if approved by SPAC shareholders (if a shareholder vote is required), executes the business combination. This transaction is often structured as a reverse merger in which the operating company merges with and into the SPAC or a subsidiary of the SPAC. While there are various ways to structure the initial business combination, the combined company following the transaction is a publicly traded company and carries on the target operating company’s business.

An IPO through a SPAC is similar to a standard reverse merger. However, unlike standard reverse mergers, SPACs come with a “clean” public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place, a built-in institutional investor base and an experienced management team. They are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies going public in standard reverse mergers. However, the merger of a SPAC with a target company presents several challenges as well, and certainly doesn’t guarantee winners.

These SPACs (also known as “blank check companies”) have become a popular way for many experienced management teams and sponsors to take companies public. How popular? Consider their growth over the past 7 years:

  • 2014: $1.8 billion dollars across 12 SPAC IPOs
  • 2015: $3.9 billion dollars across 20 SPAC IPOs
  • 2016: $3.5 billion dollars across 13 SPAC IPOs
  • 2017: $10.1 billion dollars across 34 SPAC IPOs
  • 2018: $10.7 billion dollars across 46 SPAC IPOs
  • 2019: $13.6 billion dollars across 59 SPAC IPOs
  • 2020: $83.3 billion dollars across 248 SPAC IPOs

What does 2021 and beyond have in store for you as SPACs continue to gain popularity as a potential liquidity option for many companies? Contact us for a no-obligation complementary consultation on how we may be able to facilitate a hassle-free path to your SPAC formation and entire timeline.