A SPAC is a company which is created and listed on an exchange via an initial public offering (IPO) for the sole purpose of merging with or acquiring another company. The purpose of a SPAC is to facilitate the listing of another company on a stock exchange.
A SPAC is typically only a shell corporation, meaning it does not have any operations, does not offer any products or services, and does not earn revenues. Because SPACs are very simple corporations with no product, operations or expenses, the process of getting listed on a stock exchange and launching an IPO is typically cheap and quick compared to IPOs of existing, real businesses.
A SPAC must have a sponsor. The Sponsor is an investment group or other entity which creates the SPAC and finances the cost of the IPO. In exchange for its investment, the sponsor receives shares in the SPAC.
The target company – the business which the SPAC will merge with or acquire – is not made public ahead of its IPO. Typically, the target company is not yet decided ahead of the IPO. The capital raised in the IPO is held in trust by a third-party financial service provider. Once a target company is decided on, the sponsor announces its decision to shareholders, who must approve the acquisition. The SPAC can then use the capital raised to finance the merger or acquisition. If a SPAC is unable to find a suitable target company or complete the merger or acquisition within a predetermined time frame from the IPO, the capital it raised from the sale of its shares is returned to investors.
After a SPAC merges with or acquires a target company, the SPAC becomes part of the target company, and the target company takes over the SPAC’s existing stock exchange listing.
SPACs provide companies which want to list on a stock exchange with a simpler, cheaper and faster alternative to conducting their own IPO. They are becoming increasingly popular with startups and medium-sized companies which want to list on a stock exchange to finance growth.
SPACs are sometimes referred to as blank check companies because investors who buy SPAC stock do not know which actual business their capital will end up being invested in.
Swiss stock exchanges do not currently allow SPACs to be listed, although they have been a steady fixture of US exchanges for several decades.
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