Special Purpose Acquisition Company (SPAC)
Candlefocus EditorThe structure of a SPAC is relatively straightforward. Investors purchase trust units with a par value of $10 per share, and these trust units hold the cash raised during the IPO. The trust unit holders, who include prominent private equity funds, celebrities and the general public, are subject to the terms of the trust and have recourse to the SPAC in the event of a failure to complete an acquisition within two years or a breach of fiduciary duty by the trustees.
The SPAC will then use the funds to target and acquire another company. If a suitable opportunity is found and a deal is agreed, the proceeds of the SPAC’s IPO are typically used for the transaction, as well as any additional debt or equity financing. The acquired entity will then become a publicly traded company and the equity of the newly acquired company is distributed to the trust unitholders, who can then liquidate their units in the public market.
The advantages of a SPAC are that it allows investors to gain exposure and access to companies they may not have available to them in the market, and it can provide companies with access to capital early in their life cycle. One of the key drawbacks is the risk associated with investing in a SPAC, as there is no assurance that the SPAC will find a suitable acquisition target. Furthermore, while regulation of SPACs is increasing in many jurisdictions, the regulatory environment can still be complex and largely untested in some markets.
In summary, a special purpose acquisition company is a trust created with an initial public offering of trust units in order to purchase another company. SPACs offer advantages such as access to companies that are not available to the general public and access to capital early in the life cycle of a company. However, investors should be aware of the risks involved and the complexity of the regulatory environment in which a SPAC may operate.