Special purpose acquisition companies (SPACs) are publicly listed shell companies used to take promising private companies public via mergers. They are also commonly known as “blank check” companies, because investors essentially give sponsors a blank check with which to identify and acquire a suitable target.
An expedient alternative to traditional initial public offerings (IPOs), SPACs date to the early 1990s, but exploded in popularity only recently thanks to the influence of figures like Chamath Palihapitiya, the SPAC sponsor who helped take Virgin Galactic public in 2019. According to SPACInsider, only 59 SPACs were created in 2019, but that figure jumped to 248 in 2020, and to over 600 in 2021.
Although much of the shine has worn off them at the beginning of 2022, SPACs have successfully funneled billions of dollars to early-stage technology companies, including multiple aerospace startups — giving them the capital they need to supercharge research and development and take experimental concepts through certification.
Related: Embraer SPAC deal reflects changed funding landscape for eVTOL developers
How do SPACs work in practice? Investors buy into a publicly-traded SPAC — typically at $10 per share — on the strength of its sponsors’ reputations and investment thesis. Similar to an escrow arrangement when buying a house (as the Securities and Exchange Commission explains in this helpful investor bulletin), that money is held in a third-party trust account for the acquisition of a private company. A SPAC generally has two years to identify and acquire a target, otherwise it must liquidate.
Because SPAC shareholders don’t know up front which private company will be targeted by the sponsors, they are given the option to walk away and redeem their shares for the original $10 purchase price at the time of the deal’s closure and the combination of the businesses. To ensure that the combined company will be adequately funded, the participants generally supplement the SPAC’s cash held in trust with a private investment in public equity, or PIPE, which also serves to signal the deal’s credibility.
Subscribe to TACSPACs have been especially popular with early-stage technology companies because they allow participants to make forward-looking projections with the presumed safe harbor that U.S. law extends to existing public companies, but not to those undergoing conventional IPOs. This has allowed electric vertical take-off and landing (eVTOL) developers, for example, to make optimistic forecasts of future demand for urban air mobility, making the same type of case to public investors that they would make to the venture capitalists and private investors who typically fund pre-revenue companies.
However, the SEC has signaled that it may take steps to close this apparent loophole, and that SPAC participants may have underestimated their liability exposure in the meantime. With the market now cooling on SPACs, experts predict we’ll see some evolution in how they’re structured, but that they will continue to be part of the financial landscape going forward.
Write to Elan Head at elan@theaircurrent.com
