What is a SPAC?

A special purpose acquisition company is a listed shell with no operations, no revenue and no product. It exists to do one thing: raise cash from public investors, hold it in a trust account, and use it to buy a private company, which then becomes publicly traded through the merger. If it cannot find a target in time, the cash goes back.

That is the whole idea. Everything else in this page is detail about who earns what, what protections a public shareholder actually has, and where the structure tends to disappoint.

How a SPAC works, step by step

1. A sponsor forms the shell and buys founder shares for a nominal amount, typically $25,000 for a block that will represent about 20% of the company after the IPO.
2. The shell files a registration statement on Form S-1 describing the team, the mandate and the terms, and amends it until the SEC declares it effective.
3. The IPO prices, almost always at $10.00 per unit. Each unit contains one share and a fraction of a warrant.
4. The proceeds go into a trust account held by an independent trustee and invested in short-dated government securities. They cannot be spent on operations.
5. The team looks for a target, usually with 18 to 24 months on the clock.
6. When it signs a definitive agreement, it files the deal, registers the new shares on Form S-4, and calls a shareholder vote.
7. At that vote every public shareholder may redeem their shares for their share of the trust, whether they vote for the deal or against it.
8. If the deal closes, the shell becomes the operating company under a new ticker. If it does not, the trust is returned and the vehicle winds up.

Why anyone buys one

Before a deal is announced, a SPAC is closer to a short-dated cash instrument than to an equity. The money sits in trust, the redemption right is contractual, and the holder can force a return of that cash at the next vote. The downside is knowable in a way that almost nothing else in public equities is.

That is why merger-arbitrage desks own them in size. The trade is to buy at or below trust value, collect the interest the trust earns, and redeem. It is a modest, rate-sensitive return, which is exactly why pre-deal SPACs cluster so tightly around their trust value: any real discount gets competed away.

Where the money goes

The two numbers that matter most

Trust per share

This is the trust balance divided by the public shares, and it is what a redeeming holder receives. It starts at or slightly above $10.00 and rises as the trust earns interest and as sponsors make contributions to buy more time. It is the floor under the shares before a deal closes.

The spread to trust

The gap between the market price and trust per share is the entire pre-deal trade. A discount pays a holder to carry deadline risk. A premium means the market is paying for the deal rather than for the cash, and that premium is what is at risk if the combination fails.

Where SPACs disappoint

The structure protects you well right up until the moment you decide to stay in. Once you decline to redeem, you are an ordinary shareholder in an operating company, and three things have usually happened to your claim.

• Dilution from the founder block. The sponsor's roughly 20% was bought for a nominal sum and it does not go away.
• Dilution from warrants and rights, which arrive in the share count later.
• Redemptions. When most public holders take their cash, the fixed founder block becomes a far larger share of what remains, and the target receives a fraction of the money it was promised.

This is why a de-SPAC so often drifts below $10 even when the underlying business is sound. The $10 was never a claim on a tenth of the company. Redemption rates ran above 90% through the 2022 to 2023 downturn, and many deals closed with a small fraction of the cash the target had planned around.

What happens if no deal is found

The charter requires the vehicle to redeem all public shares at trust value, delist and deregister. Public shareholders get their money back with whatever interest accrued. Founder shares and warrants expire worthless, and the sponsor loses its at-risk capital.

This is the structure working as designed rather than a failure of it. Across the market as a whole, more vehicles have wound up this way than have closed a combination.

How to read a SPAC before you touch it

1. Read the final prospectus, Form 424B4. It states the trust amount, the unit composition, the deadline and the syndicate.
2. Check trust per share in the most recent quarterly report, not the prospectus. Extensions and redemptions move it.
3. Look at how much time is left, and how many extensions have already been approved. A vehicle on its third extension is one whose sponsor is paying to stay alive.
4. Look at the sponsor's record: how many vehicles they have launched, how many closed and how many liquidated.
5. If a deal is announced, read the Form S-4. It has the target's audited numbers, the valuation and the pro-forma capital structure, and it is where the dilution becomes visible.