A Special Purpose Acquisition Company (SPAC) is a listed investment vehicle that raises funds to acquire and/or reverse merge (Business Combination) with one or more unlisted operating companies (the “Target”).
The founders (Promoters) form the management of the company: the quality and reputation of the Promoters are fundamental to the success of a SPAC. The Promoters invest their own capital in the SPAC (capital at risk) to finance its business activities.
The capital raised with the IPO is deposited in an escrow account, which cannot be accessed by the managers without the approval of a shareholders’ meeting.
The SPAC has about 18 months to identify and acquire the Target or else it will be dissolved; should this occur, the funds in the escrow account will be used to repay the shareholders; the Board of Directors has the authority to extend the maximum period for six additional months at its discretion (therefore a 24 months period overall).
The acquisition must be approved by an Extraordinary General Meeting of the SPAC’s shareholders. If the shareholders’ meeting does not approve the transaction, the Promoters will restart their search for a target company.
The shareholders who do not approve of the acquisition can be reimbursed using the funds held in the escrow account.
Therefore, a SPAC is a low-risk investment vehicle up to the moment of the acquisition but it offers a significant potential upside if the transaction proves successful.