SPACs: What Are They, and Are They a Risk to the Market?

Special purpose acquisition companies (SPACs)—also known as blank-check companies—have gained immense popularity among investors since the beginning of 2020, despite being around for decades. Offering an alternative way for companies to go public, SPACs themselves are publicly traded investment vehicles whose purpose is to bring target companies public through the process of a merger. SPACs are incredibly complex vehicles and can differ widely in size, structure, and quality, among other things.

SPACs’ goal: A faster path to public markets

The traditional initial public offering (IPO) process can be quite arduous from both a funding and regulatory perspective. Companies intending to go public embark on a long process to gain investors’ interest and investments, as well as clear regulatory hurdles. In general, SPACs aim to alleviate some of those burdens by promoting a faster and less expensive path to the public markets. The creation of the SPAC starts with a sponsor—ranging from a private equity firm to a former corporate executive—who works with an underwriter to bring the company public. After the SPAC goes public, investors are able to buy and sell shares as they would with any other public equity.

Typically, SPACs then have two years to find a company with which to merge. If a target is not found, the SPAC liquidates and distributes funds back to shareholders, and the sponsor loses its investment.