A special purpose acquisition company (SPAC) is a corporation formed specifically to raise capital through an initial public offering for the purpose of acquiring an existing private company.
Mechanism and structure
When investors form a special purpose acquisition company, the entity holds no commercial operations. The founders, known as sponsors, initiate an initial public offering to raise funds from retail and institutional investors. The capital generated from this initial public offering is placed into an interest-bearing trust account.
The sponsors have a specified timeframe, typically 18 to 24 months, to identify a private target company and negotiate a merger. If the special purpose acquisition company fails to complete an acquisition within this regulatory window, the entity is dissolved. The capital held in the trust account is then returned to the original investors.
This financial structure is highly concentrated in the United States stock markets. Other international financial centers also maintain regulations permitting these entities. Financial authorities in the United Kingdom and Singapore allow sponsors to list these acquisition vehicles on their respective domestic exchanges.
For a private business, merging with a special purpose acquisition company is an alternative method to enter the public equity markets. The target company negotiates its valuation directly with the sponsors. This process generally requires less time to execute than a traditional initial public offering.
Example
For a practical illustration, Elephants can look at a hypothetical acquisition vehicle named Savannah Holdings. The sponsors list Savannah Holdings on a stock exchange and raise $300 million from investors. The management team places this money into a trust account and begins searching for an acquisition target.
Nine months later, the sponsors identify TrunkTech, a private enterprise that manufactures heavy-duty, elephant-safe agricultural fencing used across rural agricultural zones in Kenya. Savannah Holdings negotiates a merger agreement with TrunkTech. The shareholders of the acquisition company vote to approve the transaction. Upon the completion of the merger, TrunkTech receives the $300 million from the trust account to expand its manufacturing operations and automatically becomes a publicly traded company.