A SPAC, or Special Purpose Acquisition Company, is a type of investment vehicle that is formed to raise capital through an initial public offering (IPO) with the goal of acquiring an existing company. A SPAC does not have any commercial operations but rather it raises funds from public investors with the intention of using the funds to acquire a target company. Once a SPAC raises funds through its IPO, it has a specified amount of time to identify and acquire a target company.
After a target company is identified, the SPAC must then negotiate and execute a merger or acquisition with the target company, which results in the SPAC taking the target company public. This process is also known as a "reverse merger" or a "SPAC merger". Once the merger is completed, the SPAC's shares are converted into shares of the new company, and the target company becomes publicly traded without having to go through the traditional IPO process.
Investors in a SPAC are typically issued units, which are composed of one common share and a fraction of a warrant to purchase additional shares. The warrant gives investors the right to purchase additional shares of the SPAC at a specified price at a later date. If the SPAC fails to identify a target company or complete a merger within a specified time period, usually two years, the SPAC must return the funds to investors, and the shares are typically cancelled.
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