A special purpose acquisition company (commonly known as a SPAC), has 5 key steps:
- Formation: A group of investors, often led by a sponsor or a team of experienced individuals, forms a SPAC. The SPAC is usually a shell company with no commercial operations at the time of its formation.
- IPO (Initial Public Offering): The SPAC goes public through an IPO, and its shares are traded on a stock exchange. The funds raised from the IPO are placed in an escrow account.
- Searching for a Target: After the IPO, the SPAC has a limited time (usually two years) to identify and acquire a private company, known as the “target company.” The SPAC’s management team often has expertise in a specific industry and uses this knowledge to identify potential targets.
- Merger or Acquisition: Once a suitable target is identified, the SPAC negotiates a merger or acquisition deal with the target company. The funds held in the escrow account from the IPO are used to finance the acquisition.
- Completion of the Transaction: After the merger or acquisition is approved by the SPAC shareholders, the target company becomes publicly listed through the SPAC. This process allows the target company to go public without undergoing a traditional IPO.
SPACs have gained popularity as an alternative route for companies to go public, offering a faster and potentially less expensive path compared to a traditional IPO. However, they also come with certain risks and uncertainties, and their use has been a subject of regulatory scrutiny.
How are they used?
They are used to raise capital to then acquire another company. They often operate within a specific timeframe, typically two years, and provide investors with the opportunity to participate in the growth of a yet-to-be-identified target company within a defined industry.
Why are they useful?
It allows companies to go public on the stock market without having to first undergo a traditional initial public offering (IPO), as this is done via the SPAC.
Who operates them?
Usually an experienced group of investors, known as sponsors. These sponsors are often seasoned executives, or industry experts who play a key role in raising capital through the SPAC’s initial public offering (IPO) and identifying suitable target companies for acquisition or merger. The sponsors guide the SPAC through the process of finding and completing a deal, leveraging their expertise and networks to navigate the complexities of the business combination.
