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Article | Executive Pay Memo North America

The ABCs of SPACs

What is a SPAC and why are SPACs relevant? 

Executive Compensation
N/A

By Josephine Gartrell , Murphy Ainsworth , Robert Hermenze and Shannon Williams | February 11, 2021

A primer on special purpose acquisition companies, or SPACs, with a focus on the basics in structure and terminology

Special purpose acquisition companies (also known as SPACs) have surged in popularity with nearly 250 listed in the U.S. in 2020 and close to 60 listed already in 2021. SPACs provide an alternative, streamlined process for companies to go public through an initial business combination (i.e., acquisition or merger) that bypasses the traditional initial public offering (IPO) process. They have some unique defining characteristics as well as different terminology compared with other transactions, such as:

  • A SPAC is a “blank check” company, formed for the sole purpose of combining with another company.
  • SPACs are formed by a sponsor, which is typically a management team or group of institutional or nontraditional investors.
  • SPACs are non-operating companies and have limited assets other than cash, IPO proceeds and other limited investments. A SPAC is formed solely as an acquisition tool.
  • Investment in a SPAC constitutes an investment in the sponsor. Investment in a SPAC IPO typically results in receipt of a SPAC unit, which generally converts to individual shares of common stock in the SPAC and warrants, which are rights to purchase additional shares of common stock (often at a premium from the fair market value (FMV) of the underlying stock at the time the warrant is granted) at a future date, upon successful completion of a merger with the target organization.
  • The SPAC goes through the IPO process with no commercial purpose and no identified target company for the initial business combination.
  • Once the SPAC is public, it typically has one to two years to complete an initial business transaction from the date of the SPAC IPO; however, the time period may be extended to no more than three years, upon shareholder approval. Proceeds from the SPAC IPO are maintained in a trust account until either one of the following occurs:
    • The initial business combination is consummated.
    • The SPAC is liquidated due to failure to timely consummate an initial business transaction. Upon liquidation, shareholders are entitled to a pro rata share of the amount in the trust account, but generally not more than $10/share regardless of how much a shareholder paid in the open market.
  • Once SPAC management has identified a specific initial business combination opportunity:
    • SPAC management negotiates a deal with the target.
    • SPAC management obtains the required SPAC shareholder approval (unless sponsors hold enough shares to approve the transaction without public shareholder approval).
      • If seeking public shareholder approval, sponsors provide a proxy statement.
      • If not seeking public shareholder approval, sponsors provide an information statement.
      • If shareholder approval is not required, sponsors provide a tender offer statement.
      • Upon receipt of the proxy or information statement, SPAC shareholders have redemption rights, meaning they may redeem their shares rather than become shareholders in the newly combined company.
    • A reverse merger occurs whereby the operating target merges with or into the SPAC or one of the SPAC’s subsidiaries; the combined company is a publicly traded operating company carrying on the business of the target.
  • Without business operations and employees, SPACs are subject to more limited disclosure requirements by the SEC; however, the expertise and background of the sponsors as well as the details of the sponsors’ initial investment will be disclosed in the SPAC initial prospectus and other periodic reports.
Authors

Director, Executive Compensation (San Francisco)

NA Business Development Manager, Talent and Rewards (Denver)

Analyst, Rewards (New York)

Analyst, Executive Compensation (New York)

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