SPACs: Structure and Lifecycle

A group of well-known investors raises $300 million from the public in an IPO — but the company they've just listed makes nothing, sells nothing, and employs almost no one. It's an empty shell with one job: find a private company within two years and merge with it, turning that private company into a public one without it ever running its own traditional IPO. The $300 million just sits in a trust account earning interest until that happens.

That empty shell is a SPAC — a Special Purpose Acquisition Company — and the process of merging it with an operating business is called a de-SPAC. It is a backwards way of going public: the shell lists first and finds a target later, rather than an operating company preparing itself for its own roadshow and pricing.

The lifecycle

1. SPAC IPO. The sponsor lists the shell at a fixed price — almost always $10 per unit — and the proceeds go straight into an interest-bearing trust account, untouched until a deal closes or the deadline passes.
2. Sponsor promote. In exchange for finding and negotiating the deal, the sponsor typically receives "founder shares" equal to 20-25% of the post-IPO share count for a nominal price — a significant, dilutive stake investors need to account for from day one.
3. Search period. The sponsor has a fixed window, typically two years, to find and announce a target company (the "de-SPAC" target) and negotiate merger terms.
4. Shareholder vote and redemption. SPAC shareholders vote on the proposed merger, and regardless of how they vote, each shareholder can choose to redeem their shares for their pro-rata share of the trust (roughly the $10 plus accrued interest) instead of rolling into the combined company.
5. De-SPAC merger closes (or the SPAC liquidates and returns trust cash if no deal is found in time), and the target company becomes public through the shell, without ever running its own traditional IPO roadshow.

Worked example

A SPAC IPOs 30 million units at $10, raising $300 million into trust, and grants the sponsor founder shares equal to 25% of the post-IPO share count (7.5 million shares) for a nominal $25,000.

1. Total shares after IPO. $30\text{m} + 7.5\text{m} = 37.5$ million shares, of which the sponsor holds $7.5/37.5 = 20\%$ — the "promote."
2. Trust value per public share. 300\text{m}/30\text{m} = \10.00$ per share, growing slowly with interest — this is the floor value every public shareholder can redeem for regardless of what merger is proposed.
3. If the SPAC announces a merger valuing the target at $1 billion and only 30 million public shares plus the trust cash are involved, the sponsor's 7.5 million founder shares — bought for essentially nothing — are immediately worth $7.5\text{m} \times 10 = 75$, i.e. $75 million at the $10 trust value alone, before the merged company's stock does anything at all.

What this means in practice

The SPAC structure boomed and then largely collapsed in popularity between 2020 and 2022 precisely because the mechanics above — cheap founder shares, a ticking clock pressuring sponsors to do a deal rather than the best deal, and a redemption right that lets savvy investors capture the trust yield risk-free while retail shareholders often stay in past the vote — created return profiles that favored sponsors and early SPAC-IPO buyers far more than shareholders who bought in after the merger target was announced.