The acronym stands for Special Purpose Acquisition Company, and represents an alternative route for a company to go public. Sponsors form a SPAC to raise capital through an initial public offering (“IPO”) in order to buy another unidentified private company. The SPAC initially has no commercial operations and is commonly referred to as a “shell” corporation. Once an acquisition target is identified and a transaction is negotiated, the private company merges into the SPAC (also referred to as a “reverse merger”), thus becoming public.
SPACs, also commonly known as “blank check companies,” have been around for decades but have historically had a relatively poor reputation. They were perceived as a back door way for a company to go public which avoids the scrutiny of a typical IPO process for companies that may have some past blemish (e.g., fraud). SPACs were also associated with sponsors that might not have been able to raise capital for a traditional fund. The reputation of SPACs has improved materially over the past couple of years, as more reputable brand name sponsors started raising SPACs, including well-known private equity firms, industry leaders, and even celebrities. Respected entrepreneurs and successful startups increasingly view SPACs as a viable IPO alternative.