What is a Special Purpose Acquisition Company (SPAC)?

A special purpose acquisition company (SPAC) is a publicly-traded company that raises collective investment funds in the form of blind pool capital, through an initial public offering (IPO), for the purpose of completing an acquisition of an existing company. The money raised through the IPO of a 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 a 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.

[A SPAC is formed from capital raised in a public IPO.]

Understanding Special Purpose Acquisition Company

Broadly, SPACs are part of the vast mergers and acquisitions market. They can be used by public and private companies as a tool for buying an acquisition target. As an IPO offering in the public market, they require a robust planning cycle that is typically led by an underwriting investment bank.

Structuring of a SPAC

A SPAC is formed from capital raised in a public IPO. As a publicly traded stock, a SPAC is held to the same standards of market issuance, detailed primarily in the Securities Act of 1934. However, as a SPAC, the offering has its own unique characteristics.

The founders of a SPAC can take several varieties but commonly are either public companies or private asset managers. Public companies may be interested in a SPAC IPO for the purpose of acquiring a complementary company in its industry. Private asset managers may choose to use SPAC offerings as part of a comprehensive portfolio management strategy. In forming a SPAC, the founders typically have a target or several targets in mind. Overall, the goal is primarily the same for all types of founders, to raise funds for the purpose of acquisition.

To begin the SPAC planning process, founders usually approach an investment bank to handle the IPO. The investment bank charges a fee, typically about 10% of the IPO proceeds, for its services. The chosen investment bank leads the SPAC process which includes structuring the capital raising terms, preparing and filing IPO documentation, and pre-marketing the investment offering to interested investors. As with all IPOs, the investment bank may also take an interest in the offering or provide incentive capital based on IPO performance.

The capital raised from a SPAC IPO is deposited in a trust account. Expenses and underwriting fees are typically covered by the founders. Once a SPAC offering has been completed, the management team then has a specified period of time, usually 24 months, in which to identify an appropriate acquisition target and complete the acquisition. If such a deal is made, shareholders and management of the SPAC profit through ownership of the common stock and any warrants. Stockholders are also given equity ownership in the new company through a transformation process. 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.

Market Views

A SPAC can be looked at as an IPO of a company to be named later. A 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 company to purchase.

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 technologies.

SPAC Listings

SPAC Research is one of the financial market’s leading sources for SPAC information. In their April 2018 article, A Primer on SPACs, they detail SPAC IPOs from 2015 to 2017. SRAQU, now CDEV, is one of the best performing issues from the study period with a 146.73% annualized return. The targeted company, Centennial Resource Production, LLC, is an oil and gas company with primary operations in the Delaware Basin. Subsequent to the acquisition and transformation of Centennial, it holds the new name of Centennial Resource Development Corp. and is led by Mark Papa.

Key Takeaways

  • A special purpose acquisition company is a publicly-traded company that raises collective investment funds in the form of blind pool capital, through an initial public offering, for the purpose of completing an acquisition of an existing company.
  • SPAC offerings are typically founded by either public companies or private asset managers.
  • Stockholders are given equity ownership in the newly acquired company through a transformation process if an acquisition is completed successfully. 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.