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Special purpose acquisition company (SPAC)
Also called: SPAC, blank-check company, de-SPAC, sponsor promote, founder shares
A shell company that raises money in an IPO, holds it in trust and has a limited time to merge with a private business, taking it public.
Explanation
A SPAC sells units, typically at $10 each, made of one share and a fraction of a warrant, and puts the proceeds in a trust account invested in Treasuries. Its sponsor pays a nominal sum for founder shares equal to about 20% of the company after the IPO (the “promote”). The SPAC then has a fixed window, usually 18 to 24 months unless shareholders extend it, to find a target and complete a business combination, the “de-SPAC”.
At the merger vote, public shareholders can redeem their shares for their slice of the trust, about $10 plus interest, whichever way they vote. When most of them redeem, the merged company gets little cash but still carries the sponsor’s shares, the warrants and often a PIPE or convertible financing: dilution set at the merger.
SPACs carry SIC code 6770 (blank checks). SEC rules effective in 2024 require detailed disclosure of sponsor compensation, conflicts and dilution, and make the target company a co-registrant on the de-SPAC registration statement.
Why it matters
Before the deal, a SPAC is cash in trust plus an option on a merger; after it, the share count includes the promote and the warrants. Many de-SPACs needed to raise money again soon after, which is why so many became heavy diluters.
How Equity Dictionary measures it
SPACs are recognized by SIC 6770 (until the trust is emptied) or by trust cash making up most of total assets. They get no composite score: runway and distress do not apply, because the cash sits in trust and going-concern language about the liquidation deadline is boilerplate. The headline names the trust and says dilution comes at the business combination, and the screener leaves SPACs out.
Related terms
- Private investment in public equity (PIPE): A sale of unregistered stock, convertibles or warrants by a public company directly to selected investors, who usually get the shares registered for resale afterwards.
- Warrants: Contracts issued by a company that let the holder buy new shares at a fixed exercise price until an expiry date, often five years out.
- SIC code: The four-digit Standard Industrial Classification code the SEC assigns to each registrant to describe its main line of business.
- Going concern: An accounting warning that a company may not be able to keep operating and paying its bills over the next year without raising money or restructuring.
- Dilution: The shrinking of each existing shareholder’s ownership stake when a company issues new shares.
Plain-English summary for research; not legal or investment advice.