A Step-by-Step Breakdown of How Special Purpose Acquisition Companies Secure Public Funding
Key Takeaways
- SPACs raise capital through an IPO by offering units to public investors, with proceeds held in a trust account until a business combination is consummated.
- They are formed for the sole purpose to consummate a business combination with an operating business and rely on experienced sponsors for governance and strategy.
- The IPO process includes SEC registration and investor roadshow presentations.
- Units typically consist of shares or common stock and either rights or warrants).
- Funds remain in a trust account while the SPAC searches for a target, typically for 18–24 months.
- Shareholder approval is required in connection with the SPAC’s initial business combination and investors may redeem their shares for cash if they do not support the deal.
Special Purpose Acquisition Companies (SPACs) have become an increasingly prominent vehicle in U.S. financial markets for raising capital and taking companies public. Their structured lifecycle emphasizes transparency, investor protections, and defined timelines.
This framework allows sponsors to execute disciplined acquisition strategies while offering investors access to private-market opportunities through public markets.
In this article, we outline how SPACs raise capital through IPOs and walk through each stage of the funding lifecycle—from formation to business combination completion.
What Are SPACs?
SPACs are newly formed companies created solely to raise capital in the public markets and later merge with an operating business. At inception, they have no commercial operations or revenue.
They are characterized by:
- No existing business operations
- A sponsor team responsible for strategy and governance
- Full public disclosure of structure and intent
- A fixed timeframe to complete an acquisition
Despite lacking operations, SPACs operate within a rigorous regulatory and reporting framework throughout their lifecycle.
Step-by-Step: How SPACs Secure Public Funding
1. Formation and Sponsor Commitment
A SPAC begins with its sponsors—typically experienced investors or industry professionals—who provide initial capital to cover setup costs. In return, they receive founder shares, which create a strong incentive to complete a business combination.
2. SEC Registration and Roadshow
The SPAC files a registration statement (typically Form S-1) with the SEC. This document outlines:
- Management team background
- Investment strategy
- Offering structure
Once cleared, the SPAC conducts a roadshow to market the offering to institutional and retail investors.
3. IPO and Capital Raising
In connection with the IPO, the SPAC sells units—usually priced at $10 each—consisting of:
- One share of common stock
- A warrant (or fraction) to purchase additional shares or a right to receive a fraction of a share upon consummation of a business combination
Key features:
- Pricing is typically standardized
- Investor upside is enhanced through warrants and/or rights
- IPO proceeds are placed into a protected trust account
4. Trust Account and Search Period
After the IPO, substantially all IPO proceeds are held in a trust account and invested in US government securities with a maturity of 180 days or less.
The SPAC then enters its search phase, typically lasting 18–24 months, during which it identifies, negotiates and consummates a business combination with a target company.
5. Acquisition and Shareholder Approval
Once a target is identified, the proposed merger (the “de-SPAC transaction”) is submitted for shareholder approval.
Investors can:
- Approve or vote against the transaction; and
- Remain invested or redeem their shares for a pro-rata portion of the trust account
This redemption feature is a key investor protection mechanism.
6. Closing the Business Combination
If approved, the SPAC merges with the target company, which then becomes publicly traded.
In many cases, additional funding is secured through PIPE (Private Investment in Public Equity) transactions to support the deal.
Frequently Asked Questions
What differentiates a SPAC from a traditional IPO?
SPACs go public before identifying a target, meaning investors back a management team rather than an operating business.
Who invests in SPACs?
Participants typically include institutional investors, hedge funds, and retail investors evaluating sponsor credibility and deal potential.
How long do SPACs have to complete a merger?
Usually 18–24 months, though extensions may be granted with shareholder approval.
How are sponsors compensated?
Sponsors receive founder shares (often ~20% of equity), which effectively vest upon a successful deal completion.
What happens if no deal is completed?
The SPAC is liquidated, trust funds are returned to investors, and sponsor shares are become worthless.
Conclusion
SPACs offer a structured, transparent pathway to public capital formation. From IPO to business combination, each phase is designed to balance sponsor flexibility with investor protection.
For companies seeking an alternative route to the public markets—or investors looking to access private opportunities, SPACs represent a distinctive and evolving financial vehicle.
If you're interested in exploring SPAC opportunities or taking your company public through this route, working with an experienced advisory team can help you navigate the process effectively.