SPAC

Special purpose acquisition company; a blank-check shell that takes a company public.

A Special Purpose Acquisition Company (SPAC), often called a "blank-check company," is a publicly traded corporation created solely to raise capital through an initial public offering (IPO) with the purpose of acquiring or merging with an existing private company. Unlike traditional operating companies, a SPAC has no commercial operations, products, or services at the time of its IPO. The capital raised is placed into an interest-bearing trust account while the SPAC's sponsors search for a target business to acquire, typically within a strict two-year timeframe. Once a target company is identified, the SPAC sponsors negotiate a merger, which is then put to a shareholder vote. If approved, the private target company merges with the SPAC and becomes a publicly traded entity, bypassing the traditional, more rigorous IPO process. If the SPAC fails to complete a merger within the specified deadline, the trust is liquidated, and the remaining funds are returned to the shareholders. Retail investors often care about SPACs because they offer early access to high-growth private companies that might otherwise be inaccessible. However, SPACs carry unique risks. Before a merger is announced, investors are essentially betting on the reputation and skill of the SPAC sponsors. Furthermore, early institutional investors (sponsors and PIPE investors) often receive heavily discounted shares or warrants, which can significantly dilute the value of shares held by retail investors once the merger is finalized.

SPAC Acquisition Corp raises $200 million in an IPO by selling 20 million units at $10 each. The $200 million is placed in a trust account. A year later, the sponsors identify Target Tech, a private company valued at $800 million, for a merger. To fund the deal, the SPAC uses the $200 million in trust and raises an additional $100 million from private institutional investors (PIPE). After the merger is approved, Target Tech becomes a public company, and the original SPAC shareholders now own a combined 20% stake ($200 million out of the $1 billion combined valuation) in the newly public operating business.