SPAC (Special Purpose Acquisition Company) is a listed shell company, also called a blank check company, that raises money in an IPO without an operating business and then uses the cash to acquire a private company, which becomes public through the de-SPAC transaction. Sponsors take founder shares for a nominal sum; Nasdaq rules require at least 90% of proceeds in trust and a deal within 36 months, or the trust is returned. Public shareholders can redeem at the trust value even when voting for a deal, so high redemptions shrink the cash a target receives. SEC rules effective 1 July 2024 make the target a co-registrant liable for disclosure. Licensed fintech targets also need change-of-control approval.
How does a SPAC work
Sponsors form the SPAC and buy founder shares for a nominal sum, giving them a large stake in the company after the IPO. Public investors buy units, usually a share plus a fraction of a warrant. Nasdaq's listing rules require at least 90% of the IPO proceeds to be held in a trust account and a business combination to be completed within 36 months of the IPO registration becoming effective. The combined targets must have a fair market value of at least 80% of the trust.
If no deal closes in time, the SPAC liquidates and returns the trust to shareholders. The sponsor's founder shares become worthless, which gives sponsors a strong incentive to complete some deal.
SPAC redemptions
When a deal is announced, public shareholders can redeem their shares for their pro rata share of the trust, usually around the IPO price plus interest, even if they vote for the deal. High redemptions shrink the cash the target receives.
An illustrative case: a SPAC with $200m in trust agrees to buy a payments company. If 85% of shareholders redeem, only $30m remains. Unless the sponsor has arranged additional private investment (PIPE) financing, the target receives far less than the headline figure, while the sponsor's founder shares still dilute existing owners.
SPAC vs IPO
A SPAC merger lets the target agree a valuation privately with the sponsor instead of having it set by bookbuilding, and lets it present financial projections to investors, which traditional IPOs avoid. The trade-off is cost: sponsor shares, warrants and underwriting fees dilute the target's existing owners more than a typical IPO.
SEC SPAC rules from 2024
The SEC adopted new SPAC rules on 24 January 2024, effective 1 July 2024. The target company is now a co-registrant on the de-SPAC registration statement, so its principal officers and a majority of its board sign it and take on liability for its contents. The safe harbour for forward-looking statements under the Private Securities Litigation Reform Act is not available for projections in a de-SPAC, and the rules require more disclosure about how projections were prepared. These changes removed much of the advantage SPACs had over a conventional IPO.
SPACs and regulated fintech targets
A licensed fintech merging with a SPAC goes through a change of control, so every regulator that licensed it must approve the SPAC, its sponsor and any new significant shareholders before completion. Approval timelines can run past the SPAC's deadline. For the seller, the due diligence burden runs both ways: the target must check the sponsor's funding and redemption backstops as carefully as the SPAC checks the target's licences.