Special Purpose Acquisition Vehicles

What is a Special Purpose Acquisition Vehicle?

A special purpose acquisition company (“SPAC”), or a blank check company, is a shell company with no operations. A SPAC intends to go public for raising money in order to acquire other businesses or merge with another company that uses the proceeds of the initial public offering (“IPO”) in a pre-set time frame. Stock exchange rules allow for 36 months time frame from the IPO closing date; however, most IPOs designate 24 months from the IPO date to complete the process. Many young businesses and companies go through the process of a reverse merger through SPAC and raise funds by selling equity to private investors (“PIPE” or “Private Investment in Public Equity”) to bypass the lengthy IPO process. SPAC IPOs are completed in a short time frame (matter of weeks or 8 weeks) as there are no financial statements, assets, or business risk to describe.


The shareholders of SPAC must approve the business combination. As at least 20% of SPAC’s outstanding shares are held by the founders and sponsors, and the founders vote in favor of the transaction, hence, SPAC only requires 37.5% of the public shares to achieve a majority vote for approval of a transaction. If the business combination is approved by the shareholders and financing and acquisition terms are satisfied, the combination is consummated and referred to as De-SPAC transaction and the SPAC and target combine into a publicly traded operating firm. SPACs generally state an industry or geography focus in their prospectus though they are not limited to this industry or geographical focus and can venture into new territories.


SPAC capital structure consists of Founder Shares and Founder Warrants, Public Shares and Public Warrants. Typically the public investors are sold units, that comprise of one common share and a fraction of warrant to purchase a common share in the future. The per unit price is usually $10.0 and following the IPO, the units become tradable with units, shares and whole warrants listed on the exchange. Public shares are equal to at most 80% of the shares outstanding after the IPO and founder shares are equal to 20% of the total shares outstanding after the IPO. 85% to 100% of the proceeds through a SPAC IPO is set in a Trust Account and invested in short-term government, low risks bonds or held in cash and is to be used for merger and acquisition (“M&A”) activity. The target(s) of acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net asset value at the time of the acquisition. SPACs typically target business combination targets of two to three times the size of the SPAC asset values and IPO proceeds to mitigate the dilutive impact of the founder shares (shares held by sponsors prior to SPAC IPO). There is no maximum size for the De-SPAC transaction so long as the SPAC does not turn into an investment company under the Investment Company Act of 1940 (this does not necessarily mean that the SPAC investors have to own 50% of the voting stock of the surviving company, as the Investment Company Act merely requires that the public company control its operating subsidiaries.)[1]

If a target is not found within the set time frame or SPAC’s liquidation window, it must return capital to public shareholders and dissolve itself.


SPAC allows retail investors to invest in private equity and leveraged buyout deals; a space that is mostly dominated by institutional investors due to their extensive capital and network. SPACs are generally run by experienced management teams with M&A, private equity and operational experience.

The following displays the three phases in SPAC lifetime:


Why is a Special Purpose Acquisition Vehicle created?

A SPAC is created to acquire or merge with other businesses, usually private businesses, that are planning to go public and would like to bypass the IPO lengthy process.


What are the benefits and downsides of Special Purpose Acquisition Vehicle?

For the private business, an IPO through a SPAC rather than a reverse merger, comes with a clean slate (the shell company); it raises more money than other routes such as a reverse merger; it raises more money faster than the private equity funds after the IPO; it attracts more investors including retail and institutional investors as it is more liquid; and it comes with an experienced management team. Risk factors are generally lower in a SPAC relative to a reverse merger. Management of the target company can continue to run the business, as is, under its existing name while accessing public expansion capital under a public company structure and sit on the board. Management of SPAC also join the existing board members of the target company.