Typically, SPAC IPO proceeds, less proceeds used for certain fees and expenses, are held in a trust account. You can review a SPAC’s IPO prospectus and periodic and current reports in the SEC’s EDGAR database.
In addition, given that the SPAC does not have an operating history to evaluate, it is important to review the business background of SPAC management and its sponsors.
While SPACs often are structured similarly and may be subject to certain minimum exchange listing requirements, it is important to understand the specific features of an individual SPAC, including the equity interests held by the sponsor, which may have been obtained for nominal consideration. It is important to understand the terms of your investment. Whether you are investing in a SPAC by participating in its IPO or by purchasing its securities on the open market following an IPO, you should carefully read the SPAC’s IPO prospectus as well as its periodic and current reports filed with the SEC pursuant to its ongoing reporting obligations. What do I need to know before the initial business combination? In evaluating an investment in a SPAC, there are a number of issues to consider. While there are various ways to structure the initial business combination, the combined company following the transaction is a publicly traded company and carries on the target operating company’s business. This transaction is often structured as a reverse merger in which the operating company merges with and into the SPAC or a subsidiary of the SPAC. Once the SPAC has identified an initial business combination opportunity, its management negotiates with the operating company and, if approved by SPAC shareholders (if a shareholder vote is required), executes the business combination. A SPAC may identify in its IPO prospectus a specific industry or business that it will target as it seeks to combine with an operating company, but it is not obligated to pursue a target in the identified industry. That acquisition or combination is known as the initial business combination. If you invest in a SPAC at the IPO stage, you are relying on the management team that formed the SPAC, often referred to as the sponsor(s), as the SPAC looks to acquire or combine with an operating company. Public companies may list their securities on an exchange. Eventually, that company may grow to a scale that it determines that it has the resources and structures in place for the IPO process as well as the subsequent SEC reporting requirements and elects to seek to raise capital in the public markets, thereby becoming a public company.
Traditionally, a company starts and develops a business. This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO.
Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public. These types of transactions, most commonly where a SPAC acquires or merges with a private company, occur after, often many months or more than a year after, the SPAC has completed its own IPO. Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional initial public offerings, or IPOs. SPACs have become a popular vehicle for various transactions, including transitioning a company from a private company to a publicly traded company. “SPAC” stands for special purpose acquisition company-what are also commonly referred to as blank check companies.
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It is important to understand how to evaluate an investment in a SPAC as it moves through these stages, including the financial interests and motivations of the SPAC sponsors and related persons. This bulletin provides a brief overview for investors of important concepts when considering investing in a SPAC, both (1) when the SPAC is in its shell company stage and (2) at the time of and following the initial business combination (i.e., when the SPAC acquires or merges with an operating company). You may have heard the term SPAC recently referred to in the financial or other news. The SEC’s Office of Investor Education and Advocacy (OIEA) wants to educate investors about investing in SPACs.
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