The SEC’s Office of Investor Education and Advocacy (OIEA) wants to educate investors about investing in SPACs.

You may have heard the term SPAC recently referred to in the financial or other news.

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 de-SPAC transaction (e.g., when the SPAC acquires or merges with an operating company).  It is important to understand how to evaluate an investment in a SPAC as it moves through these stages, including evaluation of the financial interests and motivations of the SPAC sponsors and related persons.   

What’s a SPAC?

“SPAC” stands for special purpose acquisition company.  SPACs have become a popular vehicle for various transactions, including transitioning a company that enters into a business combination with a SPAC from a private company to a publicly traded company.  

These types of transactions, which commonly involve a SPAC acquiring or merging with a private operating company, often occur many months or more than a year after the SPAC has completed its own initial public offering, or IPO.  Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is typically a shell company when it becomes public.  This means that it does not have an underlying operating business and does not have assets other than cash, cash equivalents and nominal other investments, including the proceeds from the IPO.  

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.  That acquisition or combination is known as the de-SPAC transaction.  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.

Once the SPAC has identified a target operating company to combine with in a de-SPAC transaction, the SPAC’s management negotiates with the target operating company and, if approved by SPAC shareholders (if a shareholder vote is required), executes the de-SPAC transaction.  This transaction is often structured as a reverse merger in which the target operating company merges with and into the SPAC or a subsidiary of the SPAC.  While there are various ways to structure the de-SPAC transaction, the combined company following the transaction is a publicly traded company and carries on the target operating company’s business.

In evaluating an investment in a SPAC, there are a number of issues to consider.   

What do I need to know before the de-SPAC transaction?

Prospectus and reports.  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.  It is important to understand the terms of your investment.  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.  More specifically, the prospectus will highlight, among other things:

• any actual or potential material conflicts of interest between the public shareholders, on the one hand, and the SPAC’s officers, directors, promoters, sponsor, or its affiliates, on the other hand;
• the compensation paid to the sponsor, its affiliates and any promoters for all services rendered in all capacities to the SPAC and its affiliates, including the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and any promoters and the price paid or to be paid for such securities;
• material dilution to public shareholders related to the compensation and any securities issuance; 
• any agreements between the SPAC sponsor and the SPAC, its officers, directors or affiliates in connection with determining whether to proceed with a de-SPAC transaction; and
• the experience and material roles and responsibilities of the SPAC sponsor, its affiliates, and any promoters.  

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.  You can review a SPAC’s IPO prospectus and periodic and current reports in the SEC’s EDGAR database.   

Trust or escrow account.  Typically, SPAC IPO proceeds, less proceeds used for certain taxes, are typically held in a trust account or an escrow account.  Similar to an escrow arrangement when buying a house, this money is held by a third party until the transaction is consummated—in the case of a SPAC, the de-SPAC transaction—or the SPAC is liquidated for not having completed a de-SPAC transaction within a certain period of time.  SPACs generally invest the proceeds in relatively safe, interest-bearing instruments, but you should carefully review the specific terms of an offering as there is no rule requiring that the proceeds only be invested in those types of instruments.  

Typically, in connection with a de-SPAC transaction, a SPAC provides its investors with the opportunity to redeem their shares rather than become a shareholder of the combined company.  If the SPAC does not complete a de-SPAC transaction, shareholders are beneficiaries of the trust or escrow and entitled to their pro rata share of the aggregate amount then on deposit in the trust or escrow account.

You should review the IPO prospectus of the SPAC to understand the terms of the trust or escrow account, including your redemption rights and the circumstances in which cash may be released from the account. 

Trading price.  In the IPO, SPACs are typically priced at $10 per unit, unlike in a traditional IPO of an operating company, where the IPO price varies depending on the particular operating company and can be based on a number of factors, including market demand and valuation of the business.  When the SPAC units (consisting of common stock and warrants (more below)) begin trading, their market prices may fluctuate, and these fluctuations may bear little relationship to the ultimate economic success of the SPAC. 
 
Period to consummate the de-SPAC transaction.  A SPAC will typically provide for a two-year period to identify and complete a de-SPAC transaction, but it can be as long as three years.  The SPAC’s governing instruments may permit it to extend that time period.  If a SPAC seeks to extend the time period, it may be required to seek shareholder approval.  If a SPAC lists its securities on an exchange, it is generally required to complete a de-SPAC transaction within three years of its IPO or face delisting.  IPO proceeds are held in the trust or escrow account until a SPAC consummates a de-SPAC transaction or liquidates.  If the SPAC is liquidated, shareholders at the time of the liquidation will be entitled to their pro rata share of the aggregate amount then on deposit in the trust or escrow account.  

In situations where there are a large number of SPACs seeking to acquire operating businesses, it is important to consider whether attractive de-SPAC transactions have and/or will become scarcer. 

Warrants.  A SPAC IPO is often structured to offer investors a unit of securities consisting of (1) shares of common stock and (2) warrants.  A warrant is a contract that gives the holder the right to purchase from the company a certain number of additional shares of common stock in the future at a certain price, often a premium to the current stock price at the time the warrant is issued.

The SPAC unit will trade for some time after the IPO.  Some time after the IPO, the SPAC common stock and warrants may begin trading on an exchange separately with their own unique trading symbols.  Often, the SPAC will file a current report on Form 8-K and issue a press release letting investors know when separate trading may commence.  Investors who purchase SPAC securities after the IPO on the open market should be aware of whether they are purchasing units, common stock, or warrants. 

The terms of warrants may vary greatly across different SPACs, and it is important to understand the terms when investing.  Terms of the warrants can include how many shares the investor has the right to purchase, the price at which and period during which shares may be purchased, the circumstances under which the SPAC may be able to redeem the warrants, and when the warrants will expire.  To learn more about the specific terms, investors should review the IPO prospectus of the particular SPAC. 

What do I need to know at the time of the de-SPAC transaction?

Share redemption and vote. Once the SPAC has identified a de-SPAC transaction opportunity, the shareholders of the SPAC will typically have the opportunity to redeem their shares and, in many cases, vote on the de-SPAC transaction.  SPAC shareholders can either remain a shareholder of the combined company after the de-SPAC transaction or redeem and receive their pro rata amount of the funds held in the trust or escrow account.  

The SPAC changes from essentially a trust or escrow account into an operating company.  As an investor, depending on how you view the prospective de-SPAC transaction, you can typically decide whether to redeem your shares for a pro rata share of the aggregate amount then on deposit in the trust or escrow account or remain an investor in the combined company going forward.  

Prospectus; proxy, information, and tender offer statements.  In many cases, SPAC shareholders will receive a prospectus in connection with the de-SPAC transaction.  In addition, if the SPAC seeks shareholder approval of the de-SPAC transaction, it will commonly provide shareholders with a combined proxy statement/prospectus in advance of the shareholder vote.  In cases where the SPAC does not solicit the approval of public shareholders, such as when the sponsor and its affiliates hold enough votes to approve the transaction, it will commonly provide shareholders with a combined information statement/prospectus in advance of the completion of the de-SPAC transaction.  

These disclosure documents will contain important information about the business of the target operating company that the SPAC wants to combine with, the financial statements of the target operating company, interests of the parties to the transaction, including the SPAC sponsor, and the terms of the de-SPAC transaction.  More specifically, they will include, among other things:

• a summary of the background of the de-SPAC transaction, including a description of any contacts, negotiations, or transactions that have occurred concerning the transaction;
• the material terms of the de-SPAC transaction, including a brief description of any related financing transaction, including any payments from the SPAC sponsor to investors;
• the reasons for engaging in the de-SPAC transaction and reasons for the structure and timing of the transaction;
• an explanation of any material differences in the rights of the security holders of the SPAC and the target company as compared with security holders of the combined company as a result of the de-SPAC transaction; 
• any material interests in the de-SPAC transaction or any related financing transaction held by (1) the SPAC sponsor, (2) the SPAC’s officers or directors, or (3) the target company’s officers or directors; 
• whether or not shareholders are entitled to any redemption or appraisal rights and, if so, a summary of those rights; and
• any determination by the board of directors as to whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders (or any comparable determination), if required by law where the SPAC is organized, and the factors considered in making the determination.  

If you decide that you do not want to remain a shareholder following the de-SPAC transaction, you will typically have the opportunity to redeem your shares of common stock for your pro rata share of the aggregate amount then on deposit in the trust or escrow account by taking the steps outlined in these disclosure documents.  

If a SPAC is not required to provide shareholders with a prospectus or proxy or information statement, you will receive a tender offer statement that contains information about the target business and your redemption rights.

You can review a SPAC’s proxy statement/prospectus, information statement/prospectus or tender offer statement in the SEC’s EDGAR database.

The interests of the sponsor.   SPAC sponsors generally purchase equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market.  As a result, investors should be aware that although most of the SPAC’s capital has been provided by IPO investors, the sponsors and potentially other initial investors will benefit more than investors from the SPAC’s completion of a de-SPAC transaction and may have an incentive to complete a transaction on terms that may be less favorable to you.  

In addition, the SPAC may require additional financings to fund the de-SPAC transaction, and those financings often involve the sponsors.  As a result, the interests of the sponsors may further diverge from your interests.  For example, additional funding from the sponsors may dilute your interest in the combined company or may be provided in the form of a loan or security that has different rights from your investments.

To learn more about a sponsor’s interests in a SPAC, you should review the SPAC’s IPO prospectus.  You can learn more about a de-SPAC transaction and the sponsor’s interest in it from the proxy statement/prospectus, information statement/prospectus or tender offer statement.

Additional Resources

To better understand celebrity involvement in SPACs, see our Investor Alert.

To learn more about initial public offerings, see our Investor Bulletin. 

For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.

Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at Help@SEC.gov.

Receive Investor Alerts and Bulletins from the Office of Investor Education and Advocacy (“OIEA”) by email. 

This Investor Bulletin represents the views of the staff of the Office of Investor Education and Advocacy.  It is not a rule, regulation, or statement of the Securities and Exchange Commission (the “Commission”).  The Commission has neither approved nor disapproved its content.  This Investor Bulletin, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.