Introduction to Special Purpose Acquisition Company (SPAC)
Special Purpose Acquisition Company (SPAC) is a company or corporation that does not undertake any commercial operations and is formed solely for raising capital investment through initial public offering or IPO.
Such companies make it possible for investors to invest in a fund which can be later used to acquire an existing business. This type of corporation or company is popularly called a bank check company.
After funds are raised by the special purpose acquisition company or SPAC, these funds are held in a trust until the acquisition is made. If the acquisition is not made, the funds are to be returned to the investors.
How does the Special Purpose Acquisition Company or SPAC work?
SPAC is formed by experienced business persons who are skilled enough and have confidence that their skills and experience will help them to select a profitable company for acquisition. The starting capital for the company is provided by the founders. This capital benefits the acquired company.
The initial public offering or IPO is issued by the management of the SPAC by forming contracts with an investment bank. The securities sold are offered at unit price which represents some shares of the common stocks.
The target company is acquired by its fair market value, which has to be 80% or more of the assets of the special purpose acquisition company or SPAC. Once the company is acquired, the founders gain about 20% of the profit from their stake in the company. Other investors gain equity interest based on their capital contribution.
If the predetermined period lapses and any legal formalities are left undone, the special purpose acquisition company or SPAC is dissolved and the contributions made by the investors are returned to them. The managers of the SPAC do not receive any salary until the deal is completed.
