A Special Purpose Acquisition Company, or SPAC, is a publicly traded investment vehicle where a management team raises capital in an IPO for the express purpose of making an acquisition. Also known as a "blank check" company, US-listed SPACs will typically grant management an 18-24 month period in which to either complete an acquisition or return capital to shareholders. IPO proceeds are kept in a segregated trust account, and investors can choose to redeem their shares for a pro rata share of the trust account if they do not wish to own the new company.
SPAC Research maintains a company page for each outstanding SPAC, with up to date details including:
Users may find the timeline most useful once a SPAC has signed a definitive merger or transaction agreement, or filed a preliminary proxy seeking to extend its charter.
The timeline provides a detailed synopsis of significant events in each SPAC's path from IPO to consummation of initial business combination. It contains summaries of a SPAC's IPO process, 8-K filings, new information revealed in any quarterly and annual reports, investor presentations, press releases and an assessment of transaction or shareholder meeting details revealed in any merger agreements or proxy statements.
SPAC Research is focused on transaction details and SPAC mechanics, not fundamental analysis of target companies. Information in the timeline is generally intended to be consumed in order, with event summaries focused on conveying the new information in a given filing.
SPAC Research begins coverage with a SPAC's S-1 filings before its IPO and terminates coverage when a SPAC consummates its initial business combination or winds up and distributes its trust account to public shareholders.
SPACs typically offer units consisting of one share of common stock and one or more derivative securities. The units trade immediately at IPO. After the underwriters have determined the extent of their over-allotment option exercise, the company will file a report on Form 8-K with the SEC containing an audited balance sheet reflecting the receipt of the gross proceeds from the IPO; After that, separate trading of SPAC components can begin. This separation often occurs on the 52nd day following the IPO, but can occur earlier, depending on underwriter discretion, or later, if set out in the initial prospectus.
SPACs generally grant underwriters an option to purchase additional units to cover over-allotments from the IPO, if any. While SPAC units will trade immediately at the IPO, the total public unit count may not be known for up to 45 days.
SPACs deposit a vast majority of IPO proceeds into a trust account. The trust account remains segregated throughout a SPAC's search for a business combination, accessible only to fund the business combination itself or to allow individual shareholders to redeem their shares for a pro rata share of the cash in the trust account (interest income from the trust account may also be accessible to pay taxes on such income or fund working capital requirements). Shareholders will generally be given an opportunity to redeem their shares for cash at the shareholder meeting to approve a business combination, or at the shareholder meeting to approve any amendment to the company's charter. The trust account will be liquidated and returned to shareholders in the event that a SPAC cannot complete an initial business combination by the end of its charter.
To redeem common shares for cash at a shareholder meeting to approve a business combination or to amend a SPAC's charter, shareholders must generally elect redemption and tender their shares to the SPAC's transfer agent at least two business days prior to such meeting. The proxy statement for such meeting will contain specific instructions.
SPAC investors will always have the opportunity to redeem public shares for a pro rata share of the cash in the trust account upon completion of an initial business combination, modification, or expiration of a company's charter. But if third parties bring claims against a SPAC, the proceeds held in a trust account could be reduced and the per-share redemption amount received by stockholders could be reduced. SPACs typically seek to have all entities they do business with execute agreements waiving any right, title, interest, or claim of any kind to any monies held in the trust account for the benefit of public stockholders. However, those parties may not execute such agreements, or even if they do, they may not be prevented from bringing claims against the trust account. SPAC sponsors or officers frequently agree to be held liable if and to the extent certain claims reduce the funds in a trust account. However, independent directors may decide not to enforce these indemnification obligations, and even if enforced, such sponsors or officers may be unable to satisfy their indemnification obligations.
If a SPAC files a bankruptcy petition or an involuntary bankruptcy petition is filed against it that is not dismissed, a bankruptcy court may seek to recover the proceeds from a distribution from the trust account.
The IPO prospectus details how each SPAC addresses such contingencies. Investors should always read the prospectus carefully before making investment decisions.
NASDAQ rules require that a SPAC's initial business combination be with one or more target businesses that together have a fair market value equal to at least 80% of the balance in the trust account (less any deferred underwriting commissions and taxes payable on interest earned) at the time of the signing of a definitive agreement.
SPAC underwriters typically receive a portion of total underwriting commissions at IPO, and a portion in the form of deferred underwriting commissions upon completion of an initial business combination. These funds sit in the trust account while a SPAC is seeking its initial business combination, and if none is consummated by a company's liquidation date, they will be returned to shareholders with the rest of the trust account.
Sometimes, SPACs eschew deferred underwriting commissions in favor of agreeing to a Business Combination Marketing Agreement with their lead underwriter. A Business Combination Marketing Agreement typically assigns a fixed percentage of offering proceeds to be payable to the underwriter upon consummation of the initial business combination. Often, a portion of this amount may be reallocated to other financial advisors at the SPAC's discretion.
SPAC sponsors and insiders ("initial shareholders") typically purchase an initial stake of "founder shares" in the company for a nominal amount before the IPO. These shares generally auto-convert into common shares at the completion of a business combination. The founder stake is often structured to represent approximately 20% ownership interest in the post-IPO company. Founder shares usually agree to waive redemption and liquidating distribution rights. The initial shareholders typically also purchase warrants and/or units from the company (at full price) simultaneously with the IPO, the proceeds from which are used to fund underwriting discounts and working capital needs. The cumulative effect is that founders purchase a significant stake in a SPAC at a deep discount whose value is only realized at the successful consummation of a business combination.
Warrants or other derivative securities sold only to initial shareholders in private placements typically have the same terms as the public version of such securities, with minor adjustments such as lock-up periods and optional cashless exercise.
A SPAC's initial shareholders generally agree to transfer restrictions on their founder shares for a specified period of time after consummation of their initial business combination.
From time to time, a SPAC's sponsor may loan money to the SPAC for working capital or other purposes. Often, these loans are convertible upon initial business combination into one or more of the SPAC's derivative securities.
At IPO, most SPACs provide for founder shares to convert into common shares on a 1-for-1 basis upon consummation of an initial business combination. However, some SPACs allow for an adjustment to the conversion ratio to preserve a minimum ownership percentage (usually 20%) by the holders of founder shares upon consummation of the initial business combination. Unless waived, this adjustment will prevent dilution to the ownership fraction of the founder shares beyond a certain threshold, even if additional common shares are issued to facilitate the business combination. Anti-dilution mechanisms typically exclude shares or equity-linked securities issued to any seller in such business combination.
SPACs follow a traditional IPO process, registering securities on form S-1 with the SEC and filing a prospectus at the time of IPO. SPAC offerings generally sell units composed of common shares and one or more derivative securities. Only the units will trade initially, separating into component securities after the underwriter over-allotment option is completed and an audited balance sheet is filed with the SEC.
From the outside, SPACs appear fairly dormant for a long period after IPO, only filing quarterly and annual reports and 8-Ks with largely perfunctory updates. During this period, management is searching for a suitable target for a business combination, and public shareholders should not expect news on that front until the signing of a letter of intent or the announcement of a definitive merger agreement.
Once a merger agreement is signed, management will announce the news on a form 8-K and work toward producing first a preliminary and then a definitive merger proxy form, if shareholder approval is necessary to approve the business combination. If shareholder approval is not necessary, management will file tender offer documents with the SEC to ensure that public shareholders are given the opportunity to redeem their shares for cash and to communicate relevant details prior to consummation of the business combination.
If all closing conditions to consummate the initial business combination are met before a SPAC is required to liquidate its trust account, the business combination can proceed. If not, the SPAC will wind up and distribute a pro rata share of its trust account to public shareholders, in which case any outstanding derivatives would expire worthless.
Often, as a SPAC's liquidation date is approaching, management will hold a shareholder meeting to approve an extension amendment and extend the amount of time by which they must consummate a business combination. If such a meeting is called, shareholders will be given the opportunity to redeem public shares for their pro rata share of the trust account and vote on whether to allow for an extension of the company's liquidation date.
SPAC IPO prospectuses are careful to disclaim that management may extend a tender offer to shareholders in order to satisfy their requirement to offer a redemption opportunity to public shareholders, if seeking shareholder approval for a given business combination is not required. Asset acquisitions and share purchases do not generally require shareholder approval, but direct mergers where the company does not survive, amendments to a company's charter, and transactions where the company issues 20% or more of its issued and outstanding shares do require shareholder approval. In practice, most SPACs end up seeking shareholder approval for business combinations, though retention of available cash from the trust account is often a much more onerous bar to clear than any shareholder approval threshold.
Every SPAC offering is different and warrants have a range of customizations that are worth understanding in detail before considering an investment. Warrants may entitle the holder to purchase a whole share or a fraction of a share. Warrants have a variety of strike prices, exercise windows, and redemption conditions. In addition, each SPAC's warrant agreement amendment thresholds may vary.
SPAC Research enumerates each of these customizations on a SPAC's company page, but investors should always read prospectuses carefully to ensure they understand all conditions relevant to warrants they are considering.
In 2018, some SPACs began including a provision in their prospectus that provides for an adjustment to the exercise price of warrants if the SPAC ends up closing a business combination by issuing equity at an effective price materially less than $10. Each SPAC's version of this provision may differ and investors should always examine individual prospectuses for the relevant details. Crescent Acquisition Corp. was the first SPAC to include such a term in its offering documents.
SPACs generally allow for the company to call outstanding warrants for redemption if the common stock underlying such warrants eclipses a certain price threshold after the warrants become exercisable. If a company calls warrants for redemption, holders typically have a 30-day window in which to sell or exercise their warrants to avoid such warrants being redeemed by the company for a nominal fee. If called for redemption, SPACs are usually allowed to require all holders wishing to exercise warrants to do so on a "cashless basis," an option that requires warrantholders to surrender their warrants in exchange for a number of common shares that represents the fair market value of such warrants.
SPACs often sell private placement warrants (or units) to initial investors on very similar terms to whatever public warrants they sell as part of the units in their IPO. The proceeds from this private placement are generally used to fund underwriting discounts and the trust account. Private placement warrants typically have the same share purchase rights, expiration window, and strike price as public warrants. However, holders usually have transfer restrictions on their private placement warrants and holders also usually have the option to exercise their private placement warrants on a cashless basis. In addition, private placement warrants are not usually redeemable by the company.
SPAC Research does not provide tax advice. All investors should consult a tax advisor before making investment decisions.
Most business combination approval or charter extension meetings will allow for the election of redemption rights up until two business days before the meeting. However, in order to exercise redemption rights, a shareholder must be a holder of record on the redemption deadline, which means the last day to buy shares in the open market and still exercise redemption rights is two business days before the redemption deadline.
Sometimes, SPACs will enforce a voting requirement in order to exercise redemptions at a shareholder meeting. In that case, a shareholder must be a holder of record on the meeting's record date in order to vote at the meeting (and thus in order to exercise redemption rights at the meeting).
SPAC Research summaries of merger proxy filings will enumerate record dates, redemption deadlines, and whether or not a voting requirement exists in order to exercise redemption rights at a given meeting.