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A special purpose acquisition company, or SPAC, is a company set up by investors with one purpose: to help a private company go public.
SPACs have helped companies like DraftKings, BuzzFeed and Virgin Orbit Holdings go public. They’ve grown more popular in recent years because they make investing in large, public companies more accessible to all investors.
What is a SPAC?
A SPAC is a shell company, or a company that doesn't produce any products or offer any services. In most cases, the SPAC will be created by a group of institutional investors, Wall Street investors, or professionals at a hedge fund or private equity firm.
SPACs are created with the sole purpose of raising money through an IPO, or initial public offering, acquiring a private company and then taking that private company public. Once the SPAC goes public and acquires the private company, that private company begins trading as a public company. It will eventually trade under its own stock ticker symbol.
» Interested in IPOs? View the best brokers for investing in IPOs
How do SPACs work?
Here’s how the process works: Once the SPAC is created, its investors, or sponsors, will begin raising money for its own IPO. As a general rule, most SPACs are priced at $10 per share. This is one big reason why SPACs make investing in a company more accessible.
Once the SPAC goes public and raises money through its IPO, that money is held in a trust until the SPAC identifies a private company that wants to go public by being acquired by the SPAC. Most SPACs are legally given from 18 months to two years to identify and acquire a target company.
When the target company is chosen and an acquisition is imminent, the SPAC’s investors have a few options: to hold onto their shares of the SPAC, which will eventually become shares of the acquired company; to exercise their warrants and buy more shares at below-market value (see the next section to learn about warrants); or to cash out their shares and receive their original investment back. Shareholders also have the option of voting against the acquisition and redeeming their shares for cash. Once the acquisition goes forth as planned, the SPAC essentially folds into the target company it acquired.
How do I invest in a SPAC?
You can invest in a SPAC the same way you’d invest in a public company: on retail brokerage websites or by working with a stockbroker.
There are several key differences between buying a share of a company’s stock and buying a share of a SPAC. When you buy a unit of a SPAC, you’ll typically receive one share of common stock and two warrants. Warrants are basically contracts that give you the right to buy more stocks of the company at a later date at a set price.
SPAC units are commonly characterized by the letter “U” at the end of the ticker symbol, which tells investors they’re buying a unit of a SPAC and not a share of a company.
What SPAC should I invest in?
Before you invest in any SPAC, be aware that SPACs aren’t formed with a specific target company in mind. Instead, the investors behind the SPAC will usually have a rough goal or area of focus, such as the aerospace industry or companies based in the southeastern United States. This dynamic is why SPACs are often called “blank check companies.”
That’s one of the risks that comes with investing in SPACs — its investors don’t know what company they’ll eventually be investing in.
Beyond that, most experts recommend researching successful SPACs and keeping track of the companies that launched those SPACs. By investing in SPACs launched by companies with a strong record of success, you’ll boost your odds of turning a profit on your investment.