SPAC (special purpose acquisition company)

A SPAC, or special purpose acquisition company, is a publicly traded shell company that raises money in an IPO with the sole purpose of merging with a private company, taking it public. Investor cash sits in a trust account until a deal is completed or the SPAC liquidates.

How it works

SPACs usually sell units at $10.00, each consisting of one share plus a fraction of a warrant or a right. The units later split into separately traded shares and warrants. IPO proceeds go into a trust invested in Treasuries. The sponsor, which organizes the SPAC, buys founder shares for a nominal sum, typically equal to 20% of the post-IPO shares, known as the promote.

The SPAC then has a deadline, often 18 to 24 months, to announce and close a merger, a process called the de-SPAC. Shareholders can vote on the deal and redeem their shares for their pro rata share of the trust, roughly $10 plus interest, whether they vote for or against. Deadlines can be extended with shareholder approval. If no deal closes, the SPAC liquidates and returns the trust. SEC rules effective in 2024 expanded disclosure requirements on sponsor compensation, conflicts and dilution.

Why it matters for traders

Before a deal, SPAC shares tend to trade near trust value, giving a low-risk floor. Deal announcements and rumors can push shares and warrants much higher. Redemptions are the key metric: high redemption rates leave the merged company with less cash and a small float, which can make the stock extremely volatile. The sponsor promote and warrants dilute public holders, so the effective cash per share can be well below $10.

Example

Hypothetical Northwind Acquisition Corp (NWAC) raises $200 million selling 20 million units at $10, each with one share and one-half warrant exercisable at $11.50. The sponsor holds 5 million founder shares, 20% of the 25 million total. NWAC announces a merger; 80% of public holders redeem, leaving $40 million in trust and 4 million public shares outstanding.

FAQ

What happens to SPAC shares if no deal is completed?

The SPAC liquidates and public shareholders receive their share of the trust, usually about $10 per share plus interest. Warrants typically expire worthless.

What is a SPAC redemption?

The right of public shareholders to cash in their shares for a pro rata portion of the trust when a deal or extension is voted on.