Special Purpose Acquisition Companies (SPACs) – Quick-Reference Guide

What is a SPAC?

SPACs are shell companies (not blank-check companies) formed to acquire one or more operating companies through a business combination. The SPAC conducts an initial public offering (“IPO”) with  the purpose of using the IPO proceeds, together with rollover equity, to fund this business combination.

Key Features of a SPAC

• A SPAC will conduct a traditional IPO process, including a firm commitment underwriting process. SPACs generally offer “units” in the IPO, comprised of one share of SPAC common stock and a warrant or fraction of a warrant to purchase SPAC common stock. The shares are subject to redemption at the end of the SPAC’s life or in connection with the approval of a business combination.
• SPAC warrants have an exercise price of $11.50 per share, 15% above the $10 per share IPO price, with anti-dilution adjustments, and are exercisable on the later of 30-days after the business combination and the 12-month anniversary of the IPO.
• Prior to the IPO, the founders will purchase shares of SPAC common stock for a nominal amount such that their total ownership following the IPO is 20% of the total shares outstanding. This founder ownership interest is referred to as the “promote.” The founder shares are locked-up for one year following the business combination.
• The founders fund the SPAC’s expenses, including an up-front portion of the underwriting discount and a modest amount of working capital, through the purchase of warrants.
• The IPO proceeds are held in a designated trust account pending a business combination by the SPAC. The funds in the trust account may only be released: (i) to fund a business combination or (ii) to redeem shares sold in the IPO.
• SPACs have a limited lifespan – usually 24 months from IPO. Stock exchange rules permit up to 36 months. If a SPAC  does not complete its business combination within 24 months,  it may seek stockholder approval to extend its lifespan or it  must use the funds in the trust account to liquidate the SPAC.

The Three Phases of the SPAC Lifecycle

IPO - 8+ weeks* 

Founders engage counsel and auditors, form the SPAC, subscribe for founder shares and warrants, prepare and file the S-1 Registration Statement, negotiate underwriting and ancillary agreements, respond to SEC comments, and conduct IPO road show, pricing and closing.

Target Search/Negotiations - ~ 24 months 

SPAC is subject to Exchange Act reporting requirements and seeks  to identify target business, conducts due diligence and negotiates acquisition agreement, potentially arranges committed PIPE and/or  debt financing, begins preparing  proxy statement/prospectus and  signs acquisition agreement.

Stockholder Approval/Closing - 3-5+ months

SPAC announces acquisition agreement, files preliminary proxy statement/prospectus, meets with SPAC investors to discuss transaction, obtains stockholder approval, redeems shares of electing holders, closes transaction, and files Super 8-K.

^{*SPAC IPOs are generally conducted much faster than operating company IPOs due to lack of operating history. IPO disclosure is fairly boilerplate in most cases.}

Capital Structure

Post-IPO, SPACs have outstanding public shares, founder shares, public warrants and founder warrants, each of which vote together  as a single class and are usually identical except for certain  anti-dilution adjustments, cashless exercise and redemption  rights afforded to the founder shares and warrants, as applicable.

Corporate Governance & Domicile

SPACs are required to comply with the stock exchange listing requirements applicable to all newly public companies, including to have a majority of independent board members, subject to phase-in exceptions applicable to all newly public companies.

• Initially, the SPAC directors are selected by the founders at the time of IPO; thereafter directors will be subject to election by the SPAC’s stockholders, in accordance with the SPAC’s certificate  of incorporation and bylaws.
• Most SPACs are formed (or convert at the time of business combination) as Delaware corporations; some are initially formed in offshore locales, most commonly the Cayman Islands, British Virgin Islands or Marshall Islands as these jurisdictions offer tax advantages and significant capital structure and stock repurchase/redemption flexibility.
• There is a standard set of contracts and documents entered into in connection with the formation of the SPAC and the IPO.  Some – the certificate of incorporation and registration rights agreement – are similar to traditional IPOs of operating companies, while others – the trust agreement – are unique to SPACs.

The Target Acquisition

SPACs are required to either consummate a business combination  or liquidate within a set period of time – most commonly 24 months but potentially as long as three years – post-IPO.

• SPACs cannot identify acquisition targets prior to the IPO or they are required to submit detailed information about the target in their IPO registration statement, potentially including the target’s financial statements, which can delay the IPO.
• Investors may redeem their shares (plus interest) regardless of their vote for or against the business combination. Investors  who redeem their shares retain their warrants if the business combination is consummated.
• The risk of share redemptions usually requires the SPAC to obtain backstop capital – from the founders, the seller or through a  PIPE or other capital raising transaction – to cover any shortfall  in the cash needed to consummate the business combination.