Special purpose acquisition companies--or SPACs--have existed since the 1980s, but they have become increasingly common in the past year. High profile names from former Speaker of the House Paul Ryan to former NFL Quarterback Colin Kaepernick have recently formed SPACs. The increasing use of these investment vehicles could represent a positive market innovation, but it also raises questions and concerns that policymakers will need to evaluate.
This briefing provides background and an explanation of SPACs, recent trends in SPAC formation, and associated policy issues.
This briefing includes:
Background on SPACs
Special purpose acquisition companies (SPACs) are companies that do not have commercial operations or assets at the time of an initial public offering (IPO); the process of a private corporation offering its first stock issuance to the public. SPACs are formed to raise capital for the purpose of acquiring businesses or assets which will not be identified until after the IPO. SPACs generally raise money to purchase other private companies and take them public.
The SPAC structure has existed since the 1980s, but SPACs have recently become an increasingly common investment vehicle. Each year since 2016 has set a record for the number of SPAC IPOs and the amount of capital raised for SPAC IPOs. The largest growth was seen In 2020 when the number of SPAC IPOs nearly quintupled from 59 to 247 (see table below).
SPAC Structure and Phases
There are three main phases in the lifecycle of a SPAC: formation and IPO; targeting and negotiations; and approval and transaction completion.
In the initial formation and IPO phase, SPACs raise capital on the public market through an IPO. A SPAC prospectus may provide information on a sector or business which it intends to target, but they are not legally obligated to follow through. After the IPO, most of the money raised must be placed in an blind trust while the SPAC attempts to identify an acquisition target. According to the Securities and Exchange Commission (SEC), SPACs are required to “keep 90% of the gross proceeds of its IPO in an escrow account through the date of a business combination.”
The target acquisition and negotiation phase is the longest phase. During this time, the SPAC sponsors will identify a private company to target for acquisition and negotiate the terms of the deal. A SPAC must complete at least one or more business combinations within 36 months. The sponsors may also seek financing to support the purchase.
The final phase involves the approval of the deal by the shareholders and a process known as a “de-spac” transaction. Once a target company is identified and a purchase or merger is agreed to, the SPAC must obtain shareholder support for the acquisition and becomes a publicly listed operating company--known as a “de-SPAC” transaction.
For more information on SPACs and recent trends in SPAC IPOs, check out these links:
SPAC Policy Issues
The increased popularity of SPAC investment vehicles has raised a number of policy concerns and questions for lawmakers to evaluate:
Regulatory Treatment: Some view the SPAC structure as a backdoor to an IPO that bypasses some of the requirements associated with the traditional IPO. Additionally, SPACs currently are exempt from blank check company regulations--which require additional reporting--in spite of their being categorized as such.
Investor Protection: Investors do not have the opportunity to know what asset or company a particular SPAC intends to purchase. While investors are able to get their money back if they do not like the SPACs proposed investment, the lack of transparency is a risk, particularly for retail investors.
Incentive Structures: SPAC sponsors typically earn a high promotion fee which is not contingent upon hitting financial targets. In order to earn their fee, SPAC sponsors must complete the de-SPAC process. As a result, there are concerns that investors clearly understand the incentives of SPAC sponsors when deciding whether to invest.
For more information on policy issues and concerns associated with SPACs, check out these links: