Special Purpose Acquisition Companies (SPACs)

What it is

A Special Purpose Acquisition Company (SPAC), also called a blank-check company, is a shell corporation with no operating business. It goes public on a US exchange, typically Nasdaq or the New York Stock Exchange, at US$10 per unit, with proceeds held in a trust account. The sponsor then has a fixed window to identify and acquire a private company in a transaction called a de-SPAC merger. Shareholders who dislike the chosen target may redeem at US$10 plus interest before the deal closes; if no deal closes in time, the trust dissolves and shareholders are refunded. The sponsor receives 20 per cent of post-IPO shares, known as the "promote", at near-zero cost, creating a structural incentive to close a deal regardless of terms. PIPE investors (private investment in public equity) often supply additional financing at the de-SPAC stage. Key players: sponsors (typically former executives or fund managers), growth-stage private companies as targets, underwriting banks, and institutional PIPE funds.

History

David Nussbaum of GKN Securities underwrote the first thirteen SPACs in 1993 and 1994, designing the vehicles to comply with US SEC Rule 419, which had barred blank-check penny stocks from exchange listings. GKN was later fined US$725,000 by the National Association of Securities Dealers for overcharging investors. The structure remained a niche of roughly 60 deals per year through the 2010s.

COVID-era zero-interest-rate conditions triggered the SPAC 3.0 explosion: 248 SPACs raised US$83 billion in 2020; 613 raised US$162 billion in 2021, representing 64 per cent of all US IPOs that year. High-profile de-SPAC mergers brought DraftKings, Lucid Motors, Virgin Galactic, and Opendoor to market. Performance was dismal. By 2023, 75 per cent of listed SPACs were trading below their US$10 issue price, and de-SPAC stocks had lost an average of 67 per cent of value from their merger price. Yale Law professor John Morley noted the pattern replicated 1920s closed-end fund collapses driven by the same double-dip fee structure.

Current state

The US SEC adopted final SPAC rules on 24 January 2024, effective 1 July 2024, by a 3-to-2 vote. The rules mandate disclosure of dilution, conflicts, and sponsor compensation in SPAC IPOs and de-SPAC mergers, and strip SPACs of the Private Securities Litigation Reform Act of 1995 safe harbor for forward-looking projections, exposing optimistic target forecasts to the same litigation risk as traditional IPO disclosures. SPAC IPO volume stabilized at approximately 57 in 2024, near the pre-boom 2019 level of 59. A SPAC 4.0 cohort has emerged with performance-tied sponsor compensation, extended deal windows of 30 to 36 months (up from 18 to 24), and higher target quality bars, including minimum US$50 million revenue thresholds. The US traditional IPO market recovered in parallel: 354 equity offerings in 2025 raised more than US$47 billion. SPACs remain a secondary path, not the dominant channel.

Relationships

SPACs give venture capital and private equity sponsors a liquidity option for portfolio companies not yet profitable enough to sustain a traditional IPO roadshow. The US Federal Reserve's interest-rate stance directly shapes SPAC economics: near-zero rates in 2020 to 2021 pushed investors into speculative vehicles; rising rates from early 2022 both raised trust redemption yields (making inaction attractive for shareholders) and compressed growth-stock multiples. Singapore Exchange and Abu Dhabi Securities Exchange have introduced SPAC frameworks, creating non-US alternatives if the SEC's 2024 rules raise costs further. Neither Quantinuum's June 2026 Nasdaq listing nor OpenAI's planned 2027 IPO used a SPAC vehicle; both chose traditional underwritten offerings, reflecting the reputational constraints the structure now carries.

What to watch

Whether the SPAC 4.0 cohort's post-merger track record through 2026 to 2027 validates the reformed sponsor-compensation model or repeats earlier cycles. The SEC's 2024 rules face legal challenges, and any narrowing by US federal courts would loosen disclosure requirements. Pre-revenue AI infrastructure companies remain natural SPAC targets given their capital intensity and long profitability horizons. The sponsor promote model is under pressure from a growing minority of 2025 and 2026 SPACs launching with reduced or deferred promotes to win institutional demand.