Special Purpose Acquisition Companies (SPACs) are formed solely to raise capital in an initial public offering (IPO) with the purpose of using the proceeds to acquire an existing company. SPACs are also called “blank check companies” because they IPO without having any actual business operations. SPACs are formed by investors, or sponsors, with expertise in a particular business sector, with the intention of pursuing deals in that area. SPACs generally have two years to complete a deal or face liquidation. For companies aiming to go public SPACs are an alternative route to a traditional IPO that can offer more speed and certainty.
A SPAC will go through the typical IPO process of registering with the Securities and Exchange Commission (SEC), clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. The IPO phase will take approximately 8-10 weeks to complete.Once the IPO process is complete, the SPAC will pursue an acquisition opportunity and negotiate a merger to acquire a private company . If the SPAC IPO proceeds are not sufficient and additional capital is needed, the sponsor may loan additional funds to the SPAC. Before signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (PIPE) commitment, to finance a portion of the purchase price. After that, the SPAC will publicly announce both the acquisition agreement and the committed financing. Following the announcement of the acquisition agreement, the SPAC will undertake a mandatory shareholder vote offering the investors the right to return their shares to the SPAC in exchange for an amount of cash roughly equal to the IPO price paid. The vote will involve the filing of a proxy statement with the SEC, review and comment by the SEC, mailing the proxy statement to the SPAC's shareholders and holding a shareholder meeting. This process can take 3-5 months to complete. If the acquisition is approved by the shareholders and the financing and other conditions specified in the acquisition agreement are satisfied, the SPAC and the target company will combine into a publicly traded operating company.
In a typical SPAC IPO, the public investors are sold units - usually at $10 each. These units normally comprise of one share of common stock and a warrant (or a fraction of a warrant) to purchase a share of common stock in the future. Following the IPO, the units become separable and at that point the investors can trade units, shares, or whole warrants, with each security separately listed on a securities exchange. The unit tickers are normally denoted with "U".
The common stock included in the units sold to the public is sometimes classified as “Class A” common stock, with the sponsor purchasing “Class B” or “Class F” common stock. The public shares and founder shares vote together as a single class and are usually identical except for certain anti-dilution adjustments. If the SPAC fails to complete a business combination in the required timeframe, all public shares are redeemed for a pro rata portion of the cash held in the trust.
The units sold to the public typically include a warrant (or a fraction of a warrant) which gives the holder the right to buy more shares at a fixed price called the exercise or strike price. The strike price for the warrants is usually $11.5 per whole warrant with anti-dilution adjustments. Warrants become exercisable only if the SPAC completes a business combination transaction before the specified liquidation date. The purchase price paid by the sponsor for the founder warrants represents the “at risk capital” of the sponsor in the SPAC.