SPACSTAR Knowledge
SPACs Explained
From the first IPO to the final merger: understand how SPACs work, which terms matter, and where the opportunities and risks lie.
The foundation
What is a SPAC?
A SPAC (Special Purpose Acquisition Company) is a publicly traded shell company created by a sponsor or sponsor team to identify and combine with an operating business. Through this de-SPAC transaction, the target can become part of a publicly traded company without completing a traditional IPO of its own.
From formation to completion
How does the process work?
- 0%SPAC/IPOCapital is raisedUnit Split may follow
- 25%LOIInitial intent
- 50%AgreementBinding terms
- 75%Merger VoteShareholder decision
- 100%MergerPublic listing
A simplified path: individual transactions may skip an LOI, change course, or end in liquidation. The percentages identify the illustrated milestones only; they do not represent probability of success, valuation, or investment performance.
- 01
Formation & IPO
A sponsor or sponsor team forms the SPAC. It raises capital in an IPO; most of the proceeds are generally placed in a trust or escrow account.
- 02
Target Search
The SPAC searches for a target within the period specified in its governing documents—often around 18 to 24 months. Extensions may be possible under specified conditions.
- 03
Proposed Transaction
Once a target is identified, the parties negotiate the transaction, publish detailed disclosures, and typically give shareholders the opportunity to vote and/or redeem their shares.
- 04
Merger or Liquidation
If the transaction closes, the combined operating company becomes publicly traded. If no transaction is completed in time, the SPAC generally liquidates and eligible public shareholders receive their pro rata share of the trust or escrow account.
Capital and trust account
IPO
In its Initial Public Offering, a SPAC typically sells units consisting of shares and warrants or, in some offerings, rights. Most IPO proceeds are generally held in a trust or escrow account until a de-SPAC transaction or liquidation. This structure limits certain pre-merger risks but does not protect investors from dilution, market losses, or an unfavorable transaction.
Disclosure and regulation
SEC
For its IPO, a SPAC files a registration statement—commonly on Form S-1—with the U.S. Securities and Exchange Commission. A proposed de-SPAC transaction also involves extensive filings and disclosures. Investors should review the prospectus and the relevant proxy, registration, information, or tender-offer documents in the SEC’s EDGAR database.
Quick reference
Key Terms
Units
- Units are often issued during the SPAC’s formation.
- They consist of one share and a fraction of a warrant or right.
- Unit Split allows investors to trade shares and warrants/rights independently after the IPO.
Warrants
- Give the holder the right—but not the obligation—to purchase shares under specified price and time conditions.
- The exercise price, expiration date, conversion ratio, and redemption provisions vary by SPAC.
- If a redemption notice or deadline is missed, warrants may expire or become nearly worthless. Investors should review the applicable prospectus and filings.
Rights
- Typically entitle the holder to receive a specified fraction of a share if the Business Combination closes.
- Unlike warrants, rights commonly convert automatically rather than requiring payment of an exercise price.
- The conversion ratio and all other conditions vary by SPAC.
Redemption
Eligible public shareholders can typically redeem their shares for a pro rata share of the amount then held in the trust or escrow account. That amount is often close to the original IPO price plus applicable interest, but it may differ depending on the SPAC’s terms, taxes, permitted withdrawals, and expenses. The market price paid for a share is not guaranteed.
LOI (Letter of Intent)
A usually non-binding statement outlining preliminary terms of a potential transaction. An LOI is not required in every SPAC transaction and may not always be publicly announced.
Definitive Agreement
Legally binding contract detailing all aspects of the merger.
At the De-SPAC transaction
What choices and consequences should investors consider?
- Review the disclosuresEvaluate the target, transaction valuation, financing, dilution, conflicts of interest, and sponsor incentives.
- Vote or tenderDepending on the structure, shareholders may vote on the transaction or receive a tender offer. The exact procedure is set out in the transaction documents.
- Redeem or remain investedEligible holders can typically request their pro rata trust-account amount or remain shareholders of the combined company. Voting and redemption rights are governed by the specific documents and may be separate decisions.
- Share conversionIf the transaction closes and shares are not redeemed, SPAC shares generally become shares of the combined public company.
- Rights conversionRights commonly convert automatically into the fraction of a share specified in their terms when the Business Combination closes.
- Warrants remain conditionalWarrants follow their own exercise, expiration, adjustment, and redemption terms and may lose substantial or all value.
A balanced view
Risks & Benefits of SPACs
Potential benefits
- An alternative and potentially faster route to public markets for a private company
- Public investors can evaluate a proposed target before deciding whether to remain invested
- Redemption rights and the trust or escrow structure can limit certain risks before the transaction closes
Key risks
- Conflicts of interest and different economic incentives for sponsors and public shareholders
- Time pressure can encourage completion of a less attractive transaction
- Uncertain target valuation, projections, financing, and post-merger performance
- Dilution from sponsor shares, warrants, rights, transaction financing, and other issuances
- Warrants and post-merger shares can lose substantial or all value
Continue exploring