SPAC
A SPAC — a special purpose acquisition company — is a listed shell that raises money in its own IPO with no business, holds it in trust, and has about two years to merge with a private company, which thereby becomes listed. The sponsor keeps a fifth of the shell's shares for almost nothing; IPO investors can redeem their cash at the merger vote. It took dozens of fintechs public in 2020–2021, most of them below $10 within a year.
- Also known as
- Special purpose acquisition company, Blank-cheque company, SPAC merger
- Used at
- companies wanting a listing faster and with a negotiated valuation rather than an IPO's book-built one; at the 2021 peak, 613 SPACs raised $162bn in the US
- Binding
- the SPAC's IPO documents; a merger agreement with the target; a shareholder vote with redemption rights; PIPE subscription agreements; the combined company's registration statement
- Typical structure
- units of one share and a fraction of a warrant sold at $10; the cash held in trust; a sponsor "promote" of 20% of the post-IPO shares for a nominal sum plus sponsor warrants; a 24-month deadline (extendable by vote) to complete a deal or liquidate
- Typical outcome in 2021–2023
- redemptions of 80–90% at the vote, so the trust delivered a fraction of the headline cash; the PIPE became the real funding; and de-SPACed fintechs traded at a median of well under $5 by 2023
- Parties
- the sponsor, the SPAC's IPO investors (mostly hedge funds who redeem), the target and its owners, PIPE investors, and the underwriters paid on the IPO and again on the merger
How a SPAC works in practice
A sponsor — a fund, an executive, a celebrity — raises $300m in a SPAC IPO: 30m units at $10, each a share plus a third of a warrant. The cash goes into trust. The sponsor receives 7.5m founder shares for $25,000. For two years the sponsor searches; when it finds a target it negotiates a merger at a valuation — say $1.2bn pre-money — and arranges a PIPE of institutions committing to buy shares at $10 to top up the cash. The SPAC's shareholders vote; each may redeem their $10 plus interest rather than hold shares in the target. In 2021 they mostly held; from 2022 they mostly redeemed, and targets that expected $300m received $40m plus the PIPE.
The economics are the sponsor's: 7.5m shares worth $75m at $10 for $25,000, whatever the target does after — a dilution the target's owners bear and often do not notice until the cap table is drawn. The target gets a listing, a negotiated valuation and whatever cash survives redemptions; it gives up the IPO's book-building, its curated shareholder base and, usually, any first-day pop — and inherits warrants that cap the upside and a shareholder register that sells.
The fintech de-SPACs of 2021 — SoFi, MoneyLion, Bakkt, Dave, Payoneer and others — are the record: some built businesses, most traded far below $10 for years, and the SPAC route closed for fintechs by 2023 as redemptions made the cash illusory.
Example
A lending fintech agrees to merge with a $300m SPAC at a $1.2bn pre-money valuation, with a $150m PIPE at $10. At the vote, 72% of the SPAC's shareholders redeem: the trust delivers $84m. The combined company receives $234m against the $450m in the announcement, after $25m of fees; its owners hold 79%, the sponsor's promote 5%, the PIPE 10% and the remaining SPAC holders 6%. The sponsor's 7.5m shares, bought for $25,000, are worth $75m on listing day. Six months later the shares trade at $3.90: the PIPE investors are down 61%, the sponsor's promote is still worth $29m, and the fintech is a listed company with a quarter of the cash it planned and 14m warrants exercisable at $11.50 that will never be in the money.
Common mistakes
- Treating the trust as committed capital when the shareholders can redeem it at the vote. - Agreeing a valuation in a negotiation with the sponsor and expecting the public market to respect it. - Ignoring the promote's dilution and the warrants' overhang in the cap table. - Listing before the company has the reporting and controls a listed company needs, so the first missed quarter is public. - For a licensed fintech, forgetting that the de-SPAC is a change of control the regulator reviews, on the SPAC's timetable.