SPAC

A SPAC, short for special purpose acquisition company, is a company with no operating business that lists on a stock exchange to raise money, then uses that money to merge with a private company and so bring it to the public market. Because it has nothing to show investors except its managers and a broad target sector, a SPAC is often called a blank-cheque company. Its founders, known as sponsors, are typically investment managers, former executives or well-known figures who promise to find a deal within a set period.

SPACs offer a route to listing that competes with a traditional initial public offering (IPO) and with direct listings. In the United States they are regulated by the Securities and Exchange Commission (SEC) and listed mainly on the Nasdaq and the New York Stock Exchange. They became a mass-market phenomenon in 2020 and 2021, including for fintech and crypto firms, before a sharp decline.

Think of a group of friends who collect money into a locked savings jar, promising to buy a good local business within two years. Anyone who chips in can see the jar, and if the friends pick a business a contributor dislikes, that person can take their money back. If no business is found in time, the jar is emptied and everyone is repaid.

A SPAC follows the same idea on a stock exchange. Investors buy shares in an empty company whose cash sits in a protected account. The managers hunt for a private firm to merge with. When they announce a deal, shareholders vote and can ask for their money back instead of staying in. If the merger goes ahead, the private firm takes over the listing and becomes a public company.

1. The listing. The SPAC sells units in its own IPO, often priced at 10 US dollars each. A unit usually combines a share with a fraction of a warrant, a right to buy more shares later at a fixed price.
2. The trust. The proceeds are placed in a trust account and invested in short-term government securities until a deal is completed.
3. The search. Sponsors usually have 18 to 24 months to agree a merger, though deadlines are often extended with shareholder approval.
4. The de-SPAC. Once a target is found, the SPAC and the private firm merge. Extra funding is often raised from institutional investors in a private placement.
5. Redemption or liquidation. Shareholders can redeem their shares for their portion of the trust instead of joining the merged company. If no deal happens, the SPAC is wound up and the trust is returned.

Sponsors are typically rewarded with a "promote", a stake of about 20 per cent of the shares after the IPO, obtained for a small payment. This is a form of merger economics peculiar to SPACs.

SPACs have existed since the 1990s but were a niche until 2020, when low interest rates, high market valuations and a wave of celebrity sponsors made them fashionable. Hundreds of SPAC IPOs took place in 2020 and 2021, raising more money than traditional IPOs in some periods, and many observers described the period as a bubble. Electric vehicle, space and fintech companies were common targets.

Crypto firms took part. Bakkt, the digital asset platform backed by Intercontinental Exchange, listed through a SPAC merger in 2021, while planned SPAC deals for the stablecoin issuer Circle and the trading platform eToro were called off in 2022 as markets fell. Many companies that listed through SPACs later traded far below the 10 dollar starting price, and the number of new SPACs collapsed from 2022.

Critics argued that SPACs let companies publish optimistic forecasts with less legal risk than in an IPO, and that ordinary investors bore costs hidden in sponsor shares and warrants. In January 2024 the SEC adopted rules aimed at SPACs, which took effect later that year. They require fuller disclosure of sponsor compensation, conflicts of interest and dilution, treat the target company as a co-registrant responsible for the merger documents, and limit the use of forecast-related legal protections. Other markets, including London, Amsterdam, Singapore and Hong Kong, adopted their own SPAC rules in the early 2020s.

• Dilution. The sponsor promote, warrants and fees reduce the value held by shareholders who stay in after the merger, often heavily when many investors redeem.
• Misaligned incentives. Sponsors usually lose their promote if no deal is done, which can push them towards a weak deal rather than none.
• Forecast risk. Targets often promoted ambitious projections that they later failed to meet, and some faced SEC enforcement or shareholder lawsuits.
• Speculative trading. SPAC shares and warrants attracted heavy speculation by retail traders on rumours of deals.

Supporters argue that SPACs give younger companies, including those backed by venture capital and private equity, faster and more certain access to public markets than a conventional underwritten offering, with a negotiated price agreed in advance. Investors who hold SPAC shares before a deal also keep the right to redeem, which limits their downside, a feature absent from ordinary common stock.

• US Securities and Exchange Commission