What is a SPAC and how do they work?

Special purpose acquisition companies (SPACs) raise 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.

According to PwC, this approach offers several distinct advantages over a traditional IPO, such as providing companies access to capital, even when market volatility and other conditions limit liquidity. SPACs could also potentially lower transaction fees as well as expedite the timeline to become a public company.

However, the merger of a SPAC with a target company presents several challenges, including having to meet an accelerated public company readiness timeline. The target company’s management team will need to focus on being ready to operate as a public company within three to five months of signing a letter of intent.

Generally, a SPAC is formed by an experienced management team or a sponsor with nominal invested capital. The remaining interest is held by public shareholders through “units” offered in an IPO of the SPAC’s shares. 

Founder shares and public shares generally have similar voting rights, with the exception that founder shares usually have sole right to elect SPAC directors. 

Following the IPO, proceeds are placed into a trust account and the SPAC typically has 18 to 24 months to identify and complete a merger with a target company, sometimes referred to as de-SPACing. 

Once a target company is identified and a merger is announced, the SPAC’s public shareholders may alternatively vote against the transaction and elect to redeem their shares.

Once formed, the SPAC will typically need to solicit shareholder approval for a merger and will prepare and file a proxy statement.

Once shareholders approve the SPAC merger and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity.