Special Purpose Acquisition Company - SPAC

What is a 'Special Purpose Acquisition Company - SPAC'

Special purpose acquisition companies (SPAC) are publicly-traded buyout companies that raise collective investment funds in the form of blind pool money, through an initial public offering (IPO), for the purpose of completing an acquisition of an existing private company, sometimes in a specified target industry such as information technology. The money raised through the IPO of an SPAC is put into a trust where it is held until the SPAC identifies a merger or acquisition opportunity to pursue with the invested funds. Shares of an SPAC are typically sold in relatively inexpensive units that include one share of common stock and a warrant conveying the right to purchase additional shares or partial shares.

BREAKING DOWN 'Special Purpose Acquisition Company - SPAC'

Special purpose acquisition companies are also sometimes referred to as targeted acquisition companies (TAC).

Critics of SPACs charge that such entities are nothing more than vehicles for investment banks to generate fees, and that SPACs effectively transfer risk almost totally onto investors. Advocates of SPACs argue that they serve an important function in advancing new businesses and technology.

How an SPAC Works

An SPAC can be looked at as an IPO of a "company to be named later." An SPAC is a shell, or blank check, company that first raises money through its IPO to acquire an unspecified target company, and then seeks out a private company to purchase.

The individuals who form an SPAC are typically people who are confident that their business reputations or experiences will enable them to identify a profitable acquisition opportunity and complete a transaction that will ultimately result in the formation of a publicly traded company. The founders of an SPAC often have an interest in a specific industry that they wish to buy into through acquiring a private company. They approach an investment bank to handle the IPO of the SPAC. The investment bank charges a fee, typically in the neighborhood of 10%, for its services.

The money invested in an SPAC is deposited in a trust account that is funded with an amount of money equaling the total of the proceeds from the IPO. Expenses and underwriting fees are covered through a private placement of warrants to insiders. Funding the SPAC trust account at 100% of the IPO proceeds provides reassurance to investors.

The management team of the SPAC then has a specified period of time, usually 24 months, in which to identify a private company acquisition target and complete the acquisition. If such a deal is made, management of the SPAC profits by means of owning 20% of the common stock acquired for nominal consideration through founder shares, and other shareholders receive an equity interest in a new company.

If an acquisition is not completed within the specified time period, then the SPAC is automatically dissolved and the money held in trust is returned to investors.