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What are Special Purpose Acquisition Companies (SPACs)?

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Special Purpose Acquisition Companies are shell or blank check companies with no underlying operating business of their own. They are legally recognized in certain jurisdictions like United States. They are incorporated especially for the purpose of undertaking any business combination transaction (merger, acquisition, etc.) with any operating business. However, they are mostly used as a vehicle to transition a privately held company to a publicly traded company, thereby bypassing the long drawn traditional IPO process.

SPACs raise capital through an IPO to acquire or merge with one or more unspecified operating businesses. The business combination transaction (merger or acquisition) has to be completed within a specified timeframe (usually 18 to 24 months) but cannot exceed three years from IPO. The proceeds from the IPO has to be placed into a trust or an escrow account for future use during the acquisition. The sponsors of the SPAC identifies target companies with whom the SPAC can merge. Once the target is identified, the modalities of the transaction are finalized. Thereafter, the transaction needs to be approved from the shareholders. Moreover, those shareholders who do not approve of the transaction get the option to redeem their shares instead of becoming a shareholder in the combined company.

However, if the SPAC does not complete a business combination transaction within the specified timeframe, then the SPAC liquidates and the shareholders who are beneficiaries of the trust, becomes entitled to the pro rata share of the aggregate amount on deposit in the trust.