SPAC

A special purpose acquisition company (SPAC) is a publicly traded company formed with the purpose of raising capital through an initial public offering (IPO) to acquire or merge with an existing business. A SPAC typically has no operations at the time of its IPO; instead, funds are held in a trust until a target is identified and a business combination is completed. If no acquisition occurs within a stated timeframe, usually 18 to 24 months, the SPAC is liquidated and the funds are returned to public investors.

Formation and structure: SPACs are guided by sponsors who contribute initial capital and often receive founder shares or warrants as compensation if a successful deal is completed. The IPO proceeds are placed in a trust, and the SPAC’s management team will search for a suitable target. The SPAC may negotiate terms with potential targets during the search period.

Process and post-merger effects: The SPAC announces a proposed acquisition, which must be approved by shareholders. Investors typically have the right to redeem their shares if they do not wish to participate in the merger. If the business combination closes, the acquired company becomes publicly traded and often undertakes a name and ticker change; warrants issued at the IPO may either remain outstanding or be affected by the terms of the deal.

Regulation, risks, and incentives: SPACs operate under securities and exchange rules, with ongoing disclosure requirements after a merger. Advantages include faster access to capital and potentially clearer valuation signals. Drawbacks include potential misalignment of sponsor incentives, limited information before deal terms are set, and dilution from founder shares and warrants. SPAC activity has fluctuated, drawing increasing regulatory attention and scrutiny.