Special purpose acquisition company (SPAC)

A SPAC is normally formed by a group of investors or sponsors who share an expertise in a particular industry. The SPAC raises capital through its IPO by offering shares to the public, with the promise of using the proceeds to acquire a private company. The SPAC itself does not have any commercial operations or assets at this stage. It is essentially a shell company whose sole purpose is to identify and acquire a target company.

After the IPO, the SPAC must identify and complete an acquisition or merger with a target private company within a specified period, typically set by the SPAC’s governing documents and usually ranging from 18 to 24 months. This target company is often a high-growth or innovative firm that seeks to go public but prefers the streamlined and potentially less arduous process provided by a SPAC.

Once a suitable target has been identified, the SPAC and the target company will negotiate and complete a merger or acquisition. This is known as the “de-SPAC” transaction. Following this transaction, the target company becomes a publicly traded entity, with its shares listed on a stock exchange.

SPACs have started to emerge as an alternative to traditional IPOs, offering a streamlined listing process, the expertise of a seasoned financial sponsor and the ability for companies to use financial projections in their disclosures.

SPACs are often referred to as “blank check companies” because they lack a specific business plan or acquisition target when they initially go public.