Quora Answer: How Does a SPAC Merger Work?

The following is my answer to a Quora question: “How does a SPAC merger work?” 

A Special Purpose Acquisition Company (SPAC), also know colloquially as a “blank cheque” company, is an entity created for the sole purpose of acquiring or merging with private companies within their specific mandate, such as sector, industry, region, economic classification, and capitalisation.  The intent is to bypass the initial public offering process, and its limitations.  The challenge is that the identity of the target company is unknown to the SPAC investors in a SPAC, hence the “blank cheque”. 

The process starts when entities or individuals form the SPAC, through a modified IPO process.  The mandate is outlined and marketed to investors.  In many cases, the is already a group of private investors within the network who put money in these vehicles.  The SPAC is marketed on the strength of the board and backers, since there is no information on the target entity or entities.  As such, the people involved carry inordinate influence on the process through name recognition in the industry. 

Funds are raised through relatively low pricing of shares and other incentives.  Fund raising has a target to be reached within a short period of time.  The SPAC then has to pass compliance requirements by the requisite regulatory authority the SPAC is registered at.  The SPAC then has a period to identify and initiate a SPAC merger.  That period is normally around two years.  It may be extended upon certain conditions being met, although that is not usual. 

A successful merger means that the acquired entity can be listed and traded on the exchange under the SPAC ticker, bypassing the normal requirements of IPO for private companies such as a certain market performance over three or more years, and other capitalisation requirements.  The process of the SPAC merger is the same as a normal merger.  An offer is made, and negotiations on the finer points of control are conducted with the management and shareholders of the target entity.  Failure to complete a SPAC merger within the period of time will result in the liquidation of the SPAC, and the return of funds, less expenses, to the investor.