A SPAC or Special Purpose Acquisition Company is a category of listed company whose main objective is to acquire or merge with another company. A SPAC does not market, offer any service, or run any operations. The only aim of a SPAC is to attract investor money through an IPO and then make the acquisition of a private company with the cash raised. After the merger, the private entity gets listed publicly without having to go through a traditional IPO process.
The SPAC process has its advantages especially for companies that see it as a faster and more predictable way to go public than a cartoon-style IPO. The target company just merges with the SPAC and goes public instead of spending so many months preparing financial disclosures, negotiating with banks, and dealing with market conditions. For investors, buying shares in a SPAC is pretty much placing a bet on the management team’s capability to locate and acquire a promising business.
SPACs have not only gained but also reached their peak popularity in the years 2020 to 2021. However, the rate of success is highly variable. In a situation where a SPAC cannot find a target company to acquire within the agreed-upon time frame (usually two years), it is then obligated to give back the investors’ money.
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In a nutshell, a SPAC is a “blank-check company” formed to go public through a merger of a private company.