Special Purpose Acquisition Company

A SPAC, short for Special Purpose Acquisition Company, is a listed shell company without its own business operations. It raises capital on the stock exchange to later acquire a company that has not yet been determined. Through the acquisition, the target company then becomes listed itself.

The process is standardised: sponsors list the vehicle, the capital raised is held in trust, and within a set period of usually two years a target must be found and the combination approved by shareholders. Failing that, the capital is returned. Investors also regularly have the right to redeem their shares in connection with the proposed combination, so the capital actually remaining is only known at completion. The financing is therefore often supplemented by a parallel private placement with institutional investors.

For a target company, potential advantages include speed and direct price negotiations with the sponsors. The disadvantages are the sponsors' compensation, which dilutes existing shareholders, and uncertainty about the funds actually delivered. The sponsors typically receive around 20 percent of the shares at a nominal price.