A special purpose acquisition company, or SPAC, also known as a ‘blank check company’, is a publicly listed firm created specifically to merge with or buy other businesses. They do not have any business operations, products or services. Instead, their only objective is to raise funds via an initial public offering (IPO) with the goal of eventually conducting M&A activity.

SPACs are an alternative way for private companies to go public quickly, without an arduous IPO process. While they have been around since the 1990s, the number of SPACs exploded in 2020 and 2021 due to pandemic-related uncertainty surrounding more traditional forms of financing – though numbers have since faded.

SPACs are typically formed by a group of experienced investors or sponsors who seek support from underwriters and institutional investors before they go public on the stock market. At their formation, SPACs will not have explicit targets for acquisition, so investors will put their faith in the expertise of the management team to successfully complete a deal.

The management team will be bound to a set timeframe – typically 18 to 24 months – to identify and go after a target company. SPACs have the option to issue debt or new shares to raise additional funds following the IPO if required. However, if an acquisition is not made within the deadline, the SPAC will be liquidated and all funds will be returned to the original investors.

Funds raised at the IPO are held in trust and used only when shareholders have approved a proposed acquisition target. Investors in SPACs often have the option to redeem shares if they do not approve of the acquisition target. While SPACs offer an alternative route to public markets, investors should be aware of potential risks, including dilution, post-merger performance volatility, and evolving regulatory requirements.