What Is A SPAC?

What Is A SPAC?

When companies go public on a stock exchange, a direct IPO is the most popular method to do so. However, it is no longer the only possible method available to companies. 

Some companies, especially those in the tech sector, can go public by merging with a special purpose acquisition company, or a SPAC. 

A SPAC is a blank check company that holds cash on its balance sheet and is designed to merge with a private company to take it public with an additional cushion of cash, 

SPACs are very popular among disruptive companies that may lack the capital to fund the ongoing compliance procedures that come with an IPO. 

SPACs have been a divisive practice among industry professionals. While proponents pointed out the financial advantages of going public via a SPAC, others were quick to point to the underwhelming performance of the stocks after a SPAC merger. 

If you are a beginner stock investor and would like to know more about how SPACs work, this Investfox guide is for you. 

How Does A SPAC Work?

SPACs fill a special niche on the market by taking companies public that might not have been able to afford an IPO otherwise. 

Many companies that go public via a SPAC are pre-revenues startups, which often causes their stocks to perform poorly after merging with the SPAC. 

Formation & IPO

When a SPAC is fully legally formed, it starts accepting investments from early-stage investors. Once the SPAC closes and the IPO of the SPAC has been a success, more investors can buy into the SPAC and increase its liquidity pool, which will later be used to merge with a private company and absorbed into its balance sheet. 

Typically, SPACs have a fixed price before they go through a merger. Most SPACs cost $10 per share prior to the merger. 

The capital raised in the SPAC's IPO is placed into a trust account, which is typically held separately from the SPAC's operations

Finding The Target Company

After the SPAC's IPO, it has a limited timeframe, typically around two years, to identify and acquire a private operating company. This target company is often referred to as the "business combination" or "de-SPAC transaction”.

The SPAC's management team, including its sponsors and advisors, actively searches for suitable target companies in specific industries or sectors.

Extensive due diligence is conducted on potential targets to assess their financial health, growth prospects, and alignment with the SPAC's investment goals.

Merger & Ongoing Operations 

  • Once a target company is identified and negotiations are successful, the SPAC announces the proposed merger or acquisition. Shareholders of the SPAC must approve the transaction
  • To complete the merger or acquisition, the SPAC may require additional funding. This can come from a variety of sources, including the initial trust account, private investments (PIPE), and debt offerings
  • Once the merger or acquisition is completed, the private company becomes a publicly traded entity. It takes on the stock exchange listing and ticker symbol of the SPAC
  • The combined entity operates as a public company, and the SPAC's management team may continue to be involved in the newly merged company's operations

Pros & Cons Of Investing In SPACs

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Investing in SPACs comes with its fair share of advantages and disadvantages and investors need to consider these factors to make sure that investing in SPACs is the right course of action for their investment objectives. 


  • Access to High-Growth Companies: SPACs offer opportunities to invest in promising private companies that may not have otherwise gone public through traditional IPOs, potentially providing access to high-growth sectors and startups
  • Liquidity and Flexibility: Investors in SPACs have the flexibility to decide whether to participate in the merger or acquisition once the target is identified, offering an exit option if they disagree with the proposed transaction
  • Experienced Management: Many SPACs are sponsored by seasoned investors or business executives with expertise in specific industries, potentially improving the chances of successful acquisitions


  • Uncertain Outcomes: SPAC investments come with inherent risks, as the success of the investment depends on the SPAC's ability to identify a suitable target, negotiate favorable terms, and execute a successful merger, which may not always occur
  • Dilution: Existing shareholders in the SPAC often face dilution as additional shares are issued to finance the merger, potentially reducing the value of their holdings
  • Lack of Control: SPAC investors have limited control over the selection of the target company and the terms of the merger, leaving decisions largely in the hands of the SPAC's management team and sponsors. This can lead to misalignment of interests

Key Takeaways From What Is A SPAC

  • A SPAC (Special Purpose Acquisition Company) is formed to acquire or merge with a private company and take it public
  • SPACs conduct an IPO to raise funds, which are held in a trust account until a target company is identified
  • The SPAC's management team actively seeks a suitable target, conducts due diligence, and negotiates a merger or acquisition
  • The transaction is subject to shareholder approval and regulatory scrutiny, including SEC approval
  • Successful mergers result in the private company becoming publicly traded, taking on the SPAC's listing and ticker symbol, offering investors access to potentially high-growth opportunities

FAQs On What Is A SPAC

How do SPACs work?

SPACs (Special Purpose Acquisition Companies) raise funds through an IPO and then search for private companies to merge with or acquire. Once a target is found and approved, the private company goes public, using the SPAC's listing, offering investors access to shares in the newly merged entity.

Is investing in SPACs risky?

Yes, investing in SPACs carries inherent risks. Success depends on the SPAC's ability to identify a suitable target, negotiate favorable terms, and execute a successful merger. Outcomes can be uncertain, leading to potential losses for investors.

Why don’t SPAC prices change?

SPAC prices can remain relatively stable, typically around the IPO price of $10 per share, because the funds raised during the IPO are placed in a trust account until a target company is identified. Price fluctuations may occur once a target is announced and as the merger progresses.