Special Purpose Acquisition Company

Special Purpose Acquisition Company

A company that is set up specifically to buy an existing company. The SPAC issues an IPO and collects investments in exchange for common shares in itself. It then uses the capital it raises to identify and then purchase a target company. Sometimes at the outset it may have identified the industry in which it wishes to buy a company, but never the company itself. If, after two years, the SPAC has not found and purchased a company successfully, the initial investments are returned to shareholders. A SPAC is also called a targeted acquisition company.

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Special purpose acquisition company (SPAC). A special purpose acquisition company (SPAC), sometimes called a blank check company or an empty shell company, uses an initial public offering (IPO) to raise money it will use to purchase or merge with an existing company.

The target company is not named at the time of the IPO, and typically has not been selected by the SPAC management. In some cases, however, the relevant sector or industry is identified in the registration documents filed with the Securities and Exchange Commission (SEC).

The terms of each deal vary, but in general, at least 80% of the capital is held in a trust account to be returned to investors if a deal is not finalized within a specific period, usually 18 to 24 months. Investors must approve any deal and acquire 80% of the new publicly held company.

SPACs are controversial, even though they account for a substantial percentage of new IPOs. Advocates point to the lower fees and greater liquidity than is typical of private equity deals. Critics warn of limited investor protections, including third-party claims against assets held in trust, as well as outsized financial benefits for management and underwriters.