Considering an IPO

SPAC: Lessons Learned

A special purpose acquisition company (SPAC) is a company designed to raise capital through an initial public offering (IPO) for the purpose of funding the merger or acquisition of target companies within a specified timeframe.

March 18, 2021
June 12, 2023

A special purpose acquisition company (SPAC) is a company designed to raise capital through an initial public offering (IPO) for the purpose of funding the merger or acquisition of target companies within a specified timeframe. SPACs are increasingly sought after as

  1. a cost-effective alternative to traditional IPOs for private company targets to go public
  2. a platform for SPAC founders to raise capital from the liquid public capital market and invest in fast-growing companies
  3. an attractive investment vehicle for investors to co-invest with top founders.

In this article, we will briefly review the history of SPACs, provide a detailed description of the SPAC process, and discern some reasons for the recent surge in SPAC popularity.

Overview Of SPAC History

1990s: SPACs first appeared in the 1990s, but then disappeared with the surge in traditional capital markets activity for small cap issues in the late 1990s.2003: SPACs returned in 2003 for a strong run.2007: In 2007, there were 66 SPAC IPOs raising a total of $12.1 billion (SPAC Analytics)2008: In early 2008, the SPAC IPO market closed, then returned in 2010 with significantly altered terms.2010: In the 2010s, private equity firms emerged as frequent SPAC sponsors.2020: In 2020, there are 75 SPAC IPOs raising a total of $28.5 billion, the highest total since its inception (as of August 2020 - KPMG).

Figure 1: Overview of SPAC History – Winston & Strawn LLP’s

The SPAC Process


The first step of the SPAC process is the SPAC IPO taking the SPAC public and raising capital.

The SPAC IPO process is similar to the normal IPO process. This process includes filing with the U.S. Securities and Exchange Commission (SEC), clearing comment letters, and conducting a roadshow, followed by a firm commitment underwriting. Unlike the common IPOs of operating companies, the SPAC IPO process is accelerated with quicker execution, considerably less complexity in operations, and less financial information to be audited and disclosed. SPACs’ financial statements are short, and the SEC comments are usually less cumbersome in nature due to SPACs’ simple structure as shell companies.

Proceeds from SPAC IPOs come mostly from the sale of shares of common stock and warrants, typically in units, to public investors. Each unit is typically comprised of one share of common stock and a fraction—usually one-third—of a warrant to purchase a share of common stock.2 The names of these units usually come with a letter “U” to differentiate them from standalone common shares. For instance, an investor can choose to invest in a SPAC, Foley Trasimene Acquisition II for instance, by purchasing one common stock share of BFT (NYSE: BFT), or they can choose to buy a unit of BFT-U (NYSE: BFT-U), which includes one common share and one-third of a warrant at a price slightly higher than that of common shares.

Proceeds raised from the SPAC public offering are then placed in a trust account that is designed to fund the SPAC’s subsequent business combinations, to redeem public shares, to pay deferred underwriting discounts, and to cover transaction expenses and working capital expenses of targets post-merger.3 The money in the trust account also comes from SPAC founders who, prior to the SPAC IPO, purchase a separate class of stock (often called the “founder shares”) that entitle them the right to receive about 20% of the post-IPO common stock. These founder shares also come with warrants of similar terms as those offered to the public.

SPACs do not need to have a specified acquisition target prior to the closing of their IPOs. In the prospectus, the SEC requires SPACs to disclose to the extent that they have no targets in place and that neither the SPACs’ officers nor directors have individually considered or specifically selected any particular business combination. However, if the founders do have specific targets, detailed information of the target’s IPO registration statement would be required in the financial statements. This would render a statement in similar form and substance to a traditional IPO and prolong the SPAC public offering process.

2. The De-SPAC Process

The De-SPAC process is similar to a public company merger, except that the acquisition requires the buyer (the SPAC) to obtain shareholder approval, while the target company is not required to file a proxy statement with the SEC.

Target businesses can be in any sector or geography, but most SPACs have a predetermined industry or geographical focus for their target companies. However, there is a limitation from the stock exchange rules: De-SPAC transactions must be with one or more target companies whose aggregate fair value is at least 80% of the assets in the trust account.4 As such, SPACs often target mergers where the target company is several times the size of the SPAC in order to mitigate the negative potential impact on founder shares.

SPACs are required to move forward with a business combination. Otherwise, they will be obligated to return the money in the trust account to public shareholders within a set period after the IPO. The period is typically 24 months from the IPO closing, which is the closing date of the initial sale of the Common Units, though the period can extend as much as three years.

Resurgence Of SPAC Popularity

The recent resurgence in SPAC popularity is attributable to the advantages that SPACs provide, volatile market valuations, and too much money chasing too few investment opportunities.

1. Advantages Of SPACs

The first reason for the recent resurgence of SPACs is the advantages that they bring to investors, target businesses, and SPAC sponsors/founders.

For target businesses that are private, a SPAC is a convenient way to go public, especially during the economic turmoil like the COVID-19 pandemic. Target company owners can avoid the hassle and lengthy nature of a traditional IPO process. As the De-SPAC transaction is similar to a merger, target founders only need to negotiate with the acquirer instead of conducting negotiations with different groups of investors in a roadshow. SPACs also allow existing owners of the target company to meaningfully share in future growth via stock-rollover after the merger.

For public investors, a SPAC is a great way to co-invest with successful founders, who are usually well-respected investors and bankers in the industry. SPAC founders can be a well-performed billion-dollar investor such as Bill Ackman whose fund’s share price jumped by 120% from a 2020 low of 1,134p on March 19, to 2,500p on December 2, 20205, or an ex-investment banker such as Michael Klein, founder of $1 billion Churchill Capital Corp. IV SPAC. For retail investors—a rising group of individuals or non-professional investors who can now partake in the trading frenzy due to the rise of zero-commission trading—SPACs are an increasingly popular investment alternative due to their anticipatedly high return and the ability to co-invest with successful founders. The rationale is simple: why should a person go through the work and headache to select investment targets and manage a portfolio if she or he can invest with top investors and bankers who have better investment expertise?

Advantages of a SPACTarget Business and Its Owners: Great access to public markets during periods of market instability; Access to capital to fund operations or growth; Ability for existing owners to share meaningfully in future growth via stock rollover not available in exit via sale.IPO Investors: Opportunity to co-invest with successful founders; Liquidity of investment; Downside protection until closing of business combination.SPAC Founders: Broader base of potential investors, greater ease in capital raising compared to private vehicle; Platform to monetize proprietary deal flow; Potentially very attractive upside.
Figure 2: Advantages of SPACs

For SPAC founders/sponsors, a SPAC is an incredible money-raising platform and an attractive investment vehicle with high potential upside. Because of their ownership of founder shares, founders/sponsors can purchase up to 20–25% of the acquired businesses at a fraction of the actual company’s value. When the deal goes through and stock prices go up, sponsors’ founder shares could turn into a gold mine. Such is the case of DraftKings, a fantasy sport betting company, whose stock price increased five-fold since its merger with a SPAC named Diamond Eagle Acquisition Corp with a $15.7 billion market capitalization.

In short, the advantages of SPACs are lucrative returns for SPAC sponsors, convenient go-public process for private target companies, and an opportunity to co-invest with top investors.

2. Volatile Market Valuation

The bear market that lasted from late February to late March 2020 sent many valuations downward. The Dow witnessed a 37% drop from its February peak to its low on March 23. However, shortly after the dip, the market observed a rapid rebound with unprecedentedly high valuations for tech firms. For example, Apple reached its first ever market capitalization of $2 trillion in August, doubling its value since the dip in March. Tesla shares also closed above the $2,000 per-share threshold before a 5:1 split that later brought its market capitalization to the record high of over $800 billion in January 2021. Despite the challenge of the bear market for most traditional IPOs, volatile valuations created an opportunity for private companies that may not otherwise have gone public in the volatile market to afford an opportunity to do so. This is especially the case for companies in the tech-related industries.

SPAC IPOs by Industry 2020: 3% Energy, 3% Industrial, 7% Healthcare, 20% TMT, 20% Financial Services, 22% Multiple, and 25% Other
Figure 3: SPAC IPOs by Industry 2020, (as of Aug 27) – KPMG Advisory6

3. Too Much Money Chasing Too Few Investments

The resurgence of SPACs in 2017 occurred when the Trump administration launched a one-time tax treatment on cash repatriation as an attempt to bring home $3 trillion cash from overseas. More than $300 billion was repatriated as of the first quarter of 2018,7 and the amount reached $1 trillion as of Dec 2019.8 Many corporations were sitting on a huge pile of cash that needed to be deployed.

Also, private equity (PE) firms—one of the most common sponsors for SPACs—now have an unprecedentedly large amount of money to invest. Fundraising activities by PE firms in the U.S. reached an all-time high in 2019 with well over $300 billion dollars ready to be invested (Figure 5). At the same time, the number of deals declined by 4% (Figure 4), while capital raised was up by 60.5% (Figure 5) in 2019.

PE Deal Activity has significantly increased from $137.9 B in 2009 to an estimated $678.0 B in 2019.
Figure 4: U.S. PE’s Deal Activity – Pitchbook9
PE fundraising activity shows an increase in capital raised to $301.3 B and a decrease in fund count to 202 in 2019 from $197.8 B and 214, respectively, in 2018.
Figure 5: U.S. PE’s Fundraising Activity – Pitchbook10

As the popular saying goes, there was too much money chasing too few deals. The lack of traditional deals pushed institutional investors to look for investment alternatives outside of their current portfolio. SPAC founders predominantly come from the well-established PE space, which makes public investors feel more comfortable investing their money in a SPAC. The number of SPACs in the market surged to a record high, reaching 75 as of August 27, 2020 with over $28.5 billion in value (Figure 6). The trend continues to accelerate, with 219 SPACs raising a total of $73 billion in proceeds, outpacing the traditional IPOs by $6 billion as of December 18 2020.11

SPAC popularity has surged in recent years from 13 deals with an amount raised of $3,224 million in 2016 to 75 deals with an amount raised of $28,537 million in 2020.
Figure 6: Investor Interest in SPACs Surge in 2020 – KMPG Advisory12

Overall, the reasons for this surge in SPAC popularity can be attributed to the immediate advantages that SPACs provide to their involved parties, volatile market valuation, and an unprecedented abundant amount of cash available to be invested.


No one knows with certainty whether the SPAC boom will last. However, the expedited process of merging with a SPAC compared to the traditional IPO route provides private companies a rapid and cost-effective way to go public. Given the current market dynamic of volatile valuation and the benefits that SPACs provide to investors, founders, and target businesses, SPACs will likely remain a popular investment alternative and an effective money-raising platform that provides high potential returns to investors.

  1. Winston Capital. “SPAC Basics Presentation”. Dec 2020.
  2. Brownstein, Andrew, et al. Harvard Law School. “The Resurgence of SPACs: Observations and Considerations”. Dec 2020.
  3. Ramey, Layne, et al. Harvard Law School. “Special Purpose Acquisition Companies: An Introduction”. Jan 2021.
  4. Ramey, Layne, et al. Harvard Law School. “Special Purpose Acquisition Companies: An Introduction”. Jan 2021.
  5. Booth, James. Financial News. “Billionaire Bill Ackman’s Pershing Square Fund Wins Promotion to UK Blue Chip Index”. Nov 2020.
  6. Zhu, Keyu, et al. KPMG Advisory. “2020: Year of the SPAC”. Dec 2020.
  7. Nutting. Rex. Market Watch. “Corporations Brought Home $350 Billion After Tax Cut, But They Haven’t Put It to Work”. Dec 2020.
  8. Pickert, Reade. Bloomberg. “U.S. Companies’ Repatriated Cash Hits $1 Trillion Under Tax Law”. Jan 2021.
  9. Pitchbook. “2019 Annual US PE Breakdown”. Dec 2020.
  10. Pitchbook. “2019 Annual US PE Breakdown”. Dec 2020.
  11. Fox, Matthew. BusinessInsider. “219 Blank-Check Companies Raised $73 Billion in 2020, Outpacing Traditional IPOs to Make This The Year of The SPAC, According to Goldman Sachs”. Jan 2021.
  12. Zhu, Keyu, et al. KPMG Advisory. “2020: Year of the SPAC”. Dec 2020.