What is a SPAC? SPAC In A Nutshell

A special purpose acquisition company (SPAC) is a company with no commercial operations that are created to raise capital through an IPO to acquire another company. The SPAC is also called for that reason a “blank check company” as it will use the money provided by investors to enable private companies to go public via the SPAC.

SPAC (Special Purpose Acquisition Company)A SPAC, also known as a blank-check company, is a publicly traded shell company with no operational business of its own. The primary purpose of a SPAC is to raise capital through an initial public offering (IPO) and then use those funds to acquire or merge with an existing private company.
StructureA SPAC is typically formed by experienced investors or a management team with expertise in a particular industry or sector. The SPAC goes public through an IPO, and the funds raised are placed into an escrow account until a suitable target company is found.
Blank-Check NatureThe term “blank-check” refers to the fact that SPACs do not have a specific business or company in mind when they go public. Investors buy shares in the SPAC with the understanding that their money will be used for a future acquisition.
TimelineSPACs have a limited timeframe, typically around two years, to identify and complete an acquisition. If they fail to do so within this period, the funds are returned to investors.
Acquisition TargetOnce a suitable target is identified, the SPAC negotiates and completes the acquisition, effectively taking the private company public through the merger. The target company’s financials and operations are then reported as part of the SPAC’s public filings.
Risks and RewardsInvestors in SPACs face risks, as the success of the investment depends on the SPAC’s ability to find a profitable target company. However, SPACs offer the potential for higher returns if the acquisition is successful and the target company performs well as a public entity.
Liquidity and Exit StrategySPAC investors have the flexibility to sell their shares on the open market at any time, providing liquidity. Additionally, sponsors of the SPAC may receive founder’s shares or promote as an incentive for successful acquisitions.
PopularitySPACs gained popularity in recent years as an alternative to traditional IPOs for private companies looking to go public quickly. They offer a streamlined process and the ability to provide forward-looking financial projections, which is not common in traditional IPOs.
RegulationSPACs are subject to regulation by the U.S. Securities and Exchange Commission (SEC) and must adhere to certain rules and disclosure requirements. The SEC closely monitors SPAC activity to protect investors and maintain market integrity.
ExamplesHigh-profile SPACs include Virgin Galactic Holdings (SPCE), DraftKings (DKNG), and Nikola Corporation (NKLA). These companies went public through SPAC mergers.
ConclusionSPACs have become a popular mechanism for companies to go public and raise capital quickly. While they offer opportunities for investors and private companies, they also come with risks, particularly if the SPAC fails to identify a suitable target or if the target company underperforms as a public entity.

Understanding a SPAC

A special purpose acquisition company is a stock exchange-listed shell corporation created by investors to acquire a private company.

In so doing, the private company becomes public without holding a traditional IPO. 

For example, Diamond Eagle Acquisition Corp. was set up in 2019 and went public as a SPAC in December of the same year.

The company then announced a merger with fantasy sports platform DraftKings and gambling tech platform SBTech.

When the deal was closed in April, DraftKings began trading as a public company.

In a period occasionally referred to as the “blank check boom”, SPACs raised a record $82 billion in 2020 as the favorite source of financing for private companies looking to go public.

The companies are usually created or sponsored by a team of institutional investors, private equity hedge funds, or even high-profile CEOs like Richard Branson and Tilman Fertitta.

How SPACs work

As hinted at in the previous section, a SPAC is formed by a management team (sponsor) with a specific skill set in a niche industry.

This team invests a small amount of investor capital – typically around $25,000 – and receive founder shares in return which equates to a 20% interest in the SPAC itself.

Next, the company executes the IPO to raise more money from public markets.

Units are typically sold at $10.00 per share, with each unit consisting of a share of common stock plus a warrant giving investors the chance to buy a common share at some future point.

The price for exercising these warrants is usually $11.50 per share.

From this point onward, the SPAC trades and behaves like any other listed company, but investors do not disclose a merger or acquisition target.

Shareholders are free to buy and sell as they please, despite having no idea about the company they are ultimately investing in. 

Once the IPO does occur, the company has around two years to seek or negotiate a buy-out.

If this process is successful, the company ticker is changed and shareholder ownership transfers to the acquired company.

Alternatively, investors can redeem their SPAC shares to recoup their initial outlay plus any interest accrued while those funds were in trust.

If a deal cannot be struck, the SPAC is liquidated with investors receiving their money back plus interest.

Advantages of SPACs

While the SPAC movement is unlikely to disappear soon, there are some inherent risks to the approach for investors and businesses alike.

Let’s take a look at some of the main advantages and disadvantages.


A company can go public using a SPAC in as little as a few months. Conventional IPO processes, on the other hand, can be tedious and play out for more than a year.

SPACs have become popular primarily because they increase business agility in an increasingly volatile global market.

Bargaining power

The owners of the target company may also be able to negotiate a better price when selling to a SPAC.

This is because the latter has a predetermined time window with which to make a deal. 

Disadvantages of SPACs


Investors who choose to invest in a SPAC IPO are absorbing a tremendous amount of risk.

For one, they are assuming the SPAC will be able to find a merger or acquisition target.

These companies are also characterized by less oversight and less disclosure, which can result in retail investors being exploited.

Low returns

In a September 2021 report from Fortune, it was discovered that approximately 70% of SPAC companies who had held an IPO in the same year were trading below their $10 offer price.

This suggests that after the initial excitement has waned, investors lose money more often than not.

How Do SPACs Get Formed?

  • Formation of the SPAC:
    • A group of investors, often led by experienced individuals such as hedge fund managers, private equity professionals, or high-profile CEOs, forms the SPAC. This group is referred to as the sponsor.
  • Capital Contribution:
    • The sponsor contributes a relatively small amount of capital to the SPAC, typically around $25,000 to $50,000. In return, they receive founder shares, usually representing a 20% interest in the SPAC.
  • Initial Public Offering (IPO):
    • The SPAC goes public through an IPO. During the IPO, the SPAC issues units that are typically priced at $10.00 per unit. Each unit typically consists of one share of common stock and a warrant.
  • Warrants:
    • The warrants included in the units give investors the option to purchase common shares of the SPAC at a predetermined price, often around $11.50 per share, at a future date. These warrants provide additional potential upside for investors.
  • Funds Held in Trust:
    • The proceeds from the IPO are placed in a trust account. These funds are held separately from the SPAC’s operational expenses and are typically invested in low-risk securities such as U.S. Treasury bonds.
  • Trading as a Public Company:
    • Once the SPAC is publicly traded, it operates like any other publicly listed company. Investors can buy and sell SPAC shares on the stock exchange.
  • Mergers and Acquisitions (M&A) Search:
    • After the IPO, the SPAC has a limited time frame, typically around two years, to identify and negotiate a merger or acquisition target. The SPAC’s management team, often led by experienced industry professionals, actively seeks potential targets.
  • Due Diligence and Negotiation:
    • The SPAC conducts due diligence on potential targets, evaluating their financial health, business prospects, and valuation. Negotiations between the SPAC and the target company may take place.
  • Shareholder Approval:
    • If a suitable target is identified and negotiations are successful, the proposed merger or acquisition requires approval from the SPAC’s shareholders. Shareholders typically vote on the transaction.
  • Completion of Transaction:
    • Once approved, the merger or acquisition is completed, and the target company becomes a publicly traded entity. The SPAC’s ticker symbol may change to reflect the new company.
  • Redemption Option:
    • Shareholders often have the option to redeem their shares at the time of the merger or acquisition if they do not wish to remain invested in the new entity. Shareholders who choose this option receive their initial investment plus any interest accrued while the funds were in the trust.
  • Post-Merger Operations:
    • After the merger or acquisition, the combined entity operates as a publicly traded company. The former SPAC shareholders now own shares in the new company.
  • Reporting and Compliance:
    • The newly merged company must comply with regulatory reporting requirements and financial disclosures, just like any other publicly traded company.

Key takeaways

  • A special purpose acquisition company (SPAC) is a company with no commercial operations that is created to raise capital through an IPO to acquire another company.
  • SPACs are usually created or sponsored by a team of institutional investors, private equity hedge funds, or high-profile CEOs. Investors typically receive shares and warrants in the IPO, which are redeemable or transferrable once the company completes a successful merger or acquisition.
  • Creating a SPAC is a more efficient way to complete an IPO than traditional approaches. But the strategy is inherently risky for retail investors and may result in low returns, with 70% of SPAC companies trading below their 2021 IPO price in September of the same year.

Key Highlights

  • Definition: A Special Purpose Acquisition Company (SPAC) is a company with no commercial operations formed to raise capital through an IPO. The purpose of a SPAC is to acquire another company, effectively taking it public.
  • SPAC Formation: A group of investors, often including institutional investors, private equity funds, or high-profile CEOs, creates a SPAC. These investors contribute a small amount of capital and receive founder shares, usually representing a 20% interest in the SPAC.
  • IPO Process: After formation, the SPAC goes public through an IPO, with units typically sold at $10.00 per share. Each unit comprises a share of common stock and a warrant that allows investors to purchase a common share at a future date, usually at $11.50 per share.
  • Trading and Behavior: Once publicly traded, a SPAC operates like any other listed company. However, it does not disclose its merger or acquisition target at this stage. Shareholders can buy and sell SPAC shares without knowledge of the target company.
  • Merger or Acquisition: The SPAC has approximately two years to seek or negotiate a merger or acquisition. If successful, the SPAC’s ticker symbol changes, and shareholders’ ownership transfers to the acquired company. Investors can also redeem their SPAC shares for their initial investment plus accrued interest.
  • Liquidation: If a deal cannot be reached within the specified timeframe, the SPAC is liquidated, and investors receive their capital back with interest.
  • Advantages:
    • Efficiency: SPACs offer a quicker route to going public compared to traditional IPOs, which can take more than a year.
    • Bargaining Power: Target companies may negotiate better terms when selling to a SPAC due to the defined time window for making a deal.
  • Disadvantages:
    • Risk: Investors in SPAC IPOs take on significant risk, as success relies on the SPAC finding a merger or acquisition target.
    • Low Returns: Many SPACs trade below their $10 IPO offer price, resulting in losses for investors.

Case Studies

Virgin Galactic Holdings (SPCE)Chamath Palihapitiya’s SPAC merged with Virgin Galactic to take the space tourism company public. The move attracted significant attention to the emerging space industry.– The merger allowed Virgin Galactic to access public markets and raise capital for its ambitious space tourism endeavors.
DraftKings Inc. (DKNG)A SPAC merger with Diamond Eagle Acquisition Corp. took DraftKings, a sports betting and daily fantasy sports company, public. It leveraged the growing interest in online sports betting.– The merger provided DraftKings with capital to expand its operations and capitalize on the expanding sports betting market in the United States.
QuantumScape Corporation (QS)QuantumScape merged with Kensington Capital Acquisition Corp. to go public. The company focuses on developing solid-state lithium-metal batteries for electric vehicles.– The SPAC merger enabled QuantumScape to access capital to accelerate battery technology development and compete in the electric vehicle market.
Opendoor Technologies Inc. (OPEN)Opendoor went public through a SPAC merger with Social Capital Hedosophia Holdings Corp. II. The company operates in the real estate technology and homebuying space.– The merger provided Opendoor with the capital needed to expand its digital platform and disrupt the traditional real estate market.
MultiPlan Corporation (MPLN)Churchill Capital Corp III acquired MultiPlan, a healthcare cost management company, through a SPAC merger. The move aimed to capitalize on healthcare cost containment.– The merger allowed MultiPlan to access public markets and pursue growth opportunities in the healthcare sector.
23andMe Holdings (ME)23andMe merged with VG Acquisition Corp. to become a publicly traded genetic testing and biotechnology company, leveraging the growing interest in personal genetics.– The merger provided 23andMe with capital to advance its genetic research and commercialize its genetic testing services.
Lucid Motors Inc. (LCID)Churchill Capital Corp IV acquired Lucid Motors, an electric vehicle manufacturer, through a SPAC merger. The move positioned Lucid as a competitor in the luxury EV market.– The merger enabled Lucid Motors to access capital for production and compete in the electric vehicle market against established players.
Hims & Hers Health, Inc. (HIMS)Hims & Hers went public through a SPAC merger with Oaktree Acquisition Corp. The company focuses on telehealth and wellness services.– The merger provided Hims & Hers with capital to expand its telehealth offerings and pursue growth opportunities in the digital health sector.
Desktop Metal, Inc. (DM)Desktop Metal merged with Trine Acquisition Corp. to become a publicly traded 3D printing technology company, aiming to disrupt traditional manufacturing.– The merger allowed Desktop Metal to access public markets and invest in developing innovative 3D printing solutions.
SoFi Technologies, Inc. (SOFI)SoFi went public through a SPAC merger with Social Capital Hedosophia Holdings Corp. V. The company offers a range of financial services, including lending and investing.– The merger provided SoFi with capital to expand its financial offerings and compete with traditional banks and financial institutions.

Connected Financial Concepts

Circle of Competence

The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 


Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Retail Investing

Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.

Profit vs. Cash Flow

Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.


Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Financial Modeling

Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Business Valuation

Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Financial Ratio



The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both. 

Financial Option

A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

Profitability Framework

A profitability framework helps you assess the profitability of any company within a few minutes. It starts by looking at two simple variables (revenues and costs) and it drills down from there. This helps us identify in which part of the organization there is a profitability issue and strategize from there.

Triple Bottom Line

The Triple Bottom Line (TBL) is a theory that seeks to gauge the level of corporate social responsibility in business. Instead of a single bottom line associated with profit, the TBL theory argues that there should be two more: people, and the planet. By balancing people, planet, and profit, it’s possible to build a more sustainable business model and a circular firm.

Behavioral Finance

Behavioral finance or economics focuses on understanding how individuals make decisions and how those decisions are affected by psychological factors, such as biases, and how those can affect the collective. Behavioral finance is an expansion of classic finance and economics that assumed that people always rational choices based on optimizing their outcome, void of context.

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