Special Purpose Acquisition Company (SPAC)
Special Purpose Acquisition Company (or SPACs) gained popularity in 2021 after a boom period for this equity offering.
A SPAC is a corporate structure that acts as a financial vehicle, for a team of investors to raise funds and acquire an existing company.
Very few SPACs existed leading up to 2020, with only a dozen or so up until the mid 2010s. 59 SPAC IPOs went public in 2019, ballooning to 248 and 613 in 2020 and 2021 respectively. Since then, fewer SPAC offerings have come to market each year.
SPAC Structure
Largely, all SPAC initial public offerings are conducted similarly. The offering is for SPAC units, which are converted to a specified mix of common shares, warrants, or rights. In the form of rights, shareholders receive their common stock along with 1/10th of a right to acquire more shares at a later date. In the form of warrants, shareholders receive their common stock along with a number of warrants.
SPACs are created and ran by a 'sponsor', or a team of dealmakers who get together to form an investment vehicle. They combine their own funds with that of interested investors to raise money in an initial public offering.
At the IPO, the sum total of funds raised are placed into a trust account that has no expenses or revenue (besides an interest-bearing trust) and is a placeholder for investor funds. These funds are either used for the acquisition or returned to shareholders at the end of the SPAC's existence.
From this point on, the sponsor has two years to complete a business combination from the date of the IPO. This may be extended multiple times for a three month period but relies on shareholder approval.
Sponsors attempt to find a 'target' business to acquire. The company is presented to shareholders, and enough time is allocated for shareholders and the sponsors to conduct due diligence in making their decision to merge or not.
Should investors agree overwhelmingly to the business combination, the transaction takes place. If they do not, the SPAC managing body will either present a new company, or more often than not - the SPAC is delisted, the trust account is liquidated, and shareholders have their investment returned.
SPAC Events
IPO :
Largely, all SPAC initial public offerings are conducted similarly. The offering is for SPAC units, which are converted to a specified mix of common shares, warrants, or rights. In the form of rights, shareholders recieve their common stock along with 1/10th of a right to acquire more shares at a later date. In the form of warrants, shareholders receive their common stock along with a number of warrants.
Extension Vote :
If a target is not presented to shareholders, or if not enough time has passed to conduct an approval vote, shareholders must vote to extend the deadline for which the business combination can be completed by or not.
Redemption :
Investors who own shares of the SPAC may not agree to the business combination, or simply want their initial investment returned. In this instance, they are able to tender their shares just before the business combination takes place. A redemption of shares involves identifying to the sponsor that the shareholder does not want to take place in the merger, their shares are terminated - decreasing the shares outstanding, and the investor receives their funds back in proportion to the value of the trust account.
Redemption numbers are NOT required to be publicly released. This can lead to speculative and inaccurate estimates of share count/share float leading into the beginning of traded of the combined entity. However, the numbers are usually released within an 8-K filing in the day or two following the final approve vote.
Approval Vote :
Shareholders are not obligated to agree to whichever merger is presented by the managing party of the SPAC. A vote takes place where shareholders decide if they agree to the business combination or not. Should the necessary votes approve combination, the merger takes place shortly thereafter. The SPAC ceases to exist, the symbol changes to the acquired company's choice, and the ownership stake is transferred to the acquired company.
De-SPAC :
This informal term refers to the commencement of trading for the combined entity. Trading begins on average sometime between 1 and 10 days after the approval is announced. Despac day is the when the SPAC ceases to exist, and the acquired company becomes a publicly traded stock. Trading does not begin in the manner a usual IPO does, and begins traded at the time of the first transaction the day of - meaning shares can begin trading as early as 4AM eastern on the first day of trading.