Special Purpose Acquisition Companies (SPAC) – A Special Breed of IPO


For any company, raising capital quickly and efficiently is a challenging process. Financing can take many different forms including venture capital, an initial public offering, business loans, private placements and even GoFundMe. Depending on what vehicle is utilized, the process can take months and be expensive. As an alternative, Special Purpose Acquisition Company (SPAC) structures have become a popular alternative.

Often referred to as blank-check companies, the sponsors of these structures have a time limit to acquire an operating business from the day the IPO funds are raised. Essentially once a business target is acquired, it is combined with the SPAC (usually through a reverse merger) turning the private company public.

SPACs have been around since the 1990s and were used in a variety of industries including healthcare, logistics, media, retail and telecommunications.

The recent resurgence of their use can be attributed to the lack of opportunities for mid-market public investors to “back” experienced managers. The vehicle gives entrepreneurs the ability to directly seek alternative means of securing equity capital and growth financing. Additionally, SEC governance of the SPAC structure and the increased involvement of bulge bracket investment banking firms has further served to legitimize this product and perhaps a greater sense that this technique will be useful over the long term.

Below is a synopsis of how this investment vehicle works.

What is a SPAC?

A Special Purpose Acquisition Company (“SPACs”) is a company formed to raise capital in an initial public offering (“IPO”) with the purpose of using the proceeds to acquire one or more unspecified businesses or assets to be identified after the IPO. From the beginning of 2014 through November 30, 2017, almost 80 SPAC IPOs have closed, raising approximately $19 billion in gross proceeds.

Who Puts Together a SPAC?

SPACs are usually formed by investors who have an interest in acquiring a business in a particular sector. A SPAC will go through the typical IPO process of filing a registration statement with the U.S. Securities and Exchange Commission (“SEC”), clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. Note that a SPAC can be considered an alternative to a Hedge Fund or other investment vehicles. Investors feel comfortable that they are buying a SPAC management team with a lot of sector expertise and experience in acquiring a company.

What Happens After the Offering?

Usually 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. A SPAC’s trust account can only be used to fund a shareholder-approved business combination or to return capital to public shareholders.

Each SPAC has its own liquidation window within which it must complete a merger or an acquisition. Otherwise it is forced to dissolve and return the assets in the trust to the public stockholders. We want to make special note that in practice, SPAC sponsors often extend the life of a SPAC by making a contribution to the trust account to entice shareholders to vote in favor of a charter amendment that delays the liquidation date.

Companies Seeking SPACs

The major benefit to a small company being acquired by a SPAC is it gives them the ability to go public via reverse merger into the SPACs clean shell company. As compared to traditional IPO, SPAC IPOs can be considerably quicker and cheaper ways of financing. Additionally, there have been many instances that the SPAC acquisition might add more value to the price of the company.

The interest in SPAC IPOs have seen a strong resurgence since 2014, with increasing amounts of capital flowing into the concept1

  • 2014: $1.8bn across 12 SPAC IPOs
  • 2015: $3.9bn across 20 SPAC IPOs
  • 2016: $3.5bn across 13 SPAC IPOs
  • 2017: $10.1bn across 34 SPAC IPOs
  • 2018: $10.7bn across 46 SPAC IPOs
  • 2019: $13.6bn across 59 SPAC IPOs

A Look at the Virgin Galactic Deal – The “Space SPAC”

  • A blank check company Social Capital Hedosophia raised over $650 million in 2017 and began trading under the ticker IPOA. The company is led by Social Capital’s outspoken CEO Chamath Palihapitiya, the SPAC promised to disrupt the IPO market for tech companies and create “IPO 2.0.
  • At the time Virgin Galactic took outside funding from an Abu Dhabi investment fund, and had planned to raise $1 billion from Saudi Arabia, until the death of Saudi journalist Jamal Khashoggi. Founder Richard Branson chose to end the relationship in late 2018. Shortly after that, representatives of the SPAC and Virgin Galactic began talks.
  • The Virgin Galactic acquisition was completed in July of 2019, and it officially made Palihapitiya chairman of the company and raised the corporation’s value by $100 million. Shares for Virgin Galactic appreciated significantly in the aftermarket.
  • This transaction has created a NYSE traded company with the historical financial statements of Virgin Galactic, but with the equity section replaced by that of Social Capital Hedosophia Holdings Corp. In April of 2020 Virgin Galactic Holdings raised $720 million for a new blank-check company, which was 20% more than its original target.

Considering a SPAC?

To review, SPACs are forming in a variety of industries and are also being used for companies that wish to public but cannot for one reason or another. This approach in going public offers several distinct advantages over a traditional IPO. SPACs could also potentially lower transaction fees as well as expedite the timeline to become a public company.

However, the merger of a SPAC with a target company presents several challenges, including having to meet an accelerated public company readiness timeline as well as complex accounting and financial reporting/registration requirements.

In conclusion, a special purpose acquisition company may serve as a suitable alternative to traditional IPOs when time, capital, or market conditions are more constrained. In recent years, SPACs have become more prevalent in the markets as companies are seeking speedier methods of going public while also obtaining capital to support the business. Companies should consider both the opportunities and trade-offs associated with SPACs and the implications a SPAC transaction will have on the business becoming a public entity.

To learn more about how your company can benefit from a SPAC, visit us at Investor Summit.