The vast majority of people are unaware as to what special purpose acquisition companies (SPAC) are. This Wall Street trend refers to companies with no commercial operations that raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. While SPAC’s have been around for many years, their popularity grew starting in 2020 and into 2021. Currently there are more than 390 active SPAC’s in the United States now seeking acquisitions with over $120 billion in equity capital.

How Does it Work?

The SPAC is typically formed by a sponsor or group of investors who make the initial investment in the company. Many SPAC’s are formed to merge with companies in a particular industry or sector, although pre-IPO a merger candidate is not allowed to be targeted or identified. The IPO of the SPAC is completed through institutional investors. Post IPO the SPAC has a 2 year window to complete a merger, which is subject to shareholder approval.

Whatever funds are raised during this process are placed in a trust account that bears interest. This money can only be taken out for the act of completing an acquisition or for the liquidation of the SPAC should they not identify a merger target. In most cases, SPACs are listed on one of the major stock exchanges after the IPO (NYSE or Nasdaq).

Why Sell to a SPAC?

For owners of smaller companies, it may be appealing to sell to a SPAC. In comparison to other deals, selling to a SPAC has the potential to result in a larger selling price than other business agreements. Additionally, the IPO process generally goes faster in one of these deals. Another big advantage of going through the SPAC process is that the investors associated with them typically have expertise in the industry they are trying to acquire a company in. For businesses wanting to be under the guidance of someone experienced in their field, selling to a SPAC would be a great option.

Reason for Their Popularity

Due to the unpredictability of various markets as a result of the global pandemic, selling or merging with SPACs has become a more popular trend. This allowed for companies to go public in the unpredictable market without the added risk of looming economic failure. Because of the quick pace of these acquisitions, many companies chose to go this route throughout 2020. As the market continues to go through unforeseeable changes, SPACs will undoubtedly continue to rise in popularity for the upcoming years.