Special-Purpose Acquisition Company (SPAC): What Is, Definition, Example, Pros and Cons

A special-purpose acquisition company (SPAC) is a type of corporation which became popular in the United States during the late 1990s and early 2000s. It is a public company that raises money by selling shares to investors and then uses that money to make acquisitions of other companies. The goal of a SPAC is to become a large, publicly-traded company.

SPAC definition

A special-purpose acquisition company (SPAC) is a company/business that exists solely to raise money through an initial public offering (IPO) or the goal of acquiring or merging with another business.

Investors in SPACs come from a wide range of sources, including well-known private equity firms and celebrities to the general public. SPACs must complete their acquisition within two years or return investors’ cash.

How does SPAC work

SPACs are mostly investor sponsored. The sponsor is typically a private equity firm, venture capital firm, or investment bank that helps to get the company off the ground by investing its own money into the business and taking it public.

The creators of a SPAC sometimes have at least one acquisition goal in mind, but they don’t disclose that target during the IPO process to avoid lengthy disclosures.

Once the SPAC completes its IPO, it has 24 months to consummate a merger or acquisition. If the company fails to do so, it will be liquidated and investors will get their money back.

Benefits of SPACs

SPACs have become increasingly popular in recent years as a way for companies to go public without going through the traditional IPO process.

There are several benefits of going public via a SPAC, including a shorter timeline, fewer regulatory hurdles, and greater flexibility in terms of deal structure.

SPACs also tend to be less expensive than traditional IPOs, making them an attractive option for companies with limited resources.

Perhaps most importantly, SPACs provide a way for companies to access the public markets without giving up control of their business.

For all these reasons, SPACs are likely to continue to grow in popularity in the years to come.

Downsides of SPACs

Although there are many advantages to going public via a SPAC, there are also some potential downsides to consider.

One of the biggest risks is that the SPAC may not be able to find a suitable acquisition target within the allotted time frame. If this happens, the SPAC will be liquidated and investors will lose their money.

Another risk is that the acquired company may not be well-managed, which could lead to financial problems down the road.

Finally, there is the possibility that the SPAC may overpay for the acquired company, which could leave shareholders with significant losses.

While there are some potential risks associated with SPACs, they can still be a viable option for companies looking to go public.

Conclusion

SPAC or Special-purpose acquisition company could be a very beneficial way for a company to go public. There are both positives and negatives to using a SPAC but ultimately it could be a great way to avoid the lengthy IPO process. Considering a SPAC might be a great option for your company.

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