Special Purpose Acquisition Company: A Simple Definition

A special purpose acquisition company (SPAC), also known as a "blank check company" is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process. According to the U.S. Securities and Exchange Commission (SEC), "A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe.

The opportunity usually has yet to be identified". SPACs raised a record $82 billion in 2020, a period sometimes referred to as the "blank check boom". Because a SPAC is registered with the SEC and is a publicly traded company, the general public can buy its shares before the merger or acquisition takes place.

For this reason, they've been referred to as the 'poor man's private equity funds.' Academic analysis shows the investor returns on SPACs post-merger are almost uniformly heavily negative (however, sponsors at the flotation of the SPAC can earn excess returns), and their proliferation usually accelerates around periods of economic bubbles, such as the everything bubble in 2020–2021 when the volume and quantity of capital raised by SPACs set new all-time records. A special purpose acquisition company is formed to raise money through an initial public offering to buy another company.

At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition. Investors in SPACs can range from well-known private equity funds to the general public. SPACs have two years to complete an acquisition or they must return their funds to investors.

What Is a Special Purpose Acquisition Company (SPAC)?

A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as "blank check companies," SPACs have been around for decades. In recent years, they've become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money in 2019. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.

How a SPAC Works SPACs are generally formed by investors, or sponsors, with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don't identify that target to avoid extensive disclosures during the IPO process. (This is why they are called "blank check companies." IPO investors have no idea what company they ultimately will be investing in.) SPACs seek underwriters and institutional investors before offering shares to the public. The money SPACs raise in an IPO is placed in an interest-bearing trust account. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. A SPAC generally has two years to complete a deal or face liquidation. In some cases, some of the interest earned from the trust can be used as the SPAC's working capital.

After an acquisition, a SPAC is usually listed on one of the major stock exchanges. Advantages of a SPAC : Selling to a SPAC can be an attractive option for the owners of a smaller company, which are often private equity funds. First, selling to a SPAC can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment. SPACs Make a Comeback: SPACs have become more common in recent years, with their IPO fundraising hitting a record $13.6 billion in 2019—more than four times the $3.2 billion they raised in 2016.

They have also attracted big-name underwriters such as Goldman Sachs, Credit Suisse, and Deutsche Bank, as well as retired or semi-retired senior executives looking for a shorter-term opportunity. Examples of High-Profile SPAC Deals: One of the most high-profile recent deals involving special purpose acquisition companies involved Richard Branson's Virgin Galactic. Venture capitalist Chamath Palihapitiya's SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million before listing the company in 2019.1 In 2020, Bill Ackman, founder of Pershing Square Capital Management, sponsored his own SPAC, Pershing Square Tontine Holdings, the largest-ever SPAC, raising $4 billion in its offering on July 22.