FAQs: SPAC Key Terms

SPAC

(Special Purpose Acquisition Company)

Special purpose acquisition companies, also known as SPACs, are publicly traded shell companies that are created to raise capital through an initial public offering (IPO). This capital is used to acquire or merge an existing private company. SPACs have no operating activities of their own and consist mainly of the money raised and an experienced management team looking for suitable acquisition targets.

After the IPO, the raised capital is deposited in an escrow account and may only be used for the acquisition. As soon as the management team has found a suitable company, the proposed merger is put to the SPAC shareholders for a vote. If the majority of shareholders vote in favor, the private company will be floated on the stock exchange through the merger with SPAC. Shareholders who do not agree with the transaction have the opportunity to return their shares and recover their invested capital.

SPACs offer an attractive alternative to traditional IPOs as they are often faster and less regulatory burdensome. However, they are also associated with significant risks, as success depends heavily on the competence of the management team. In recent years, SPACs have grown in popularity, presenting both opportunities and challenges for investors and companies.

IPO

(Initial Public Offering)

An initial public offering (IPO) is the process by which a private company offers its shares to the public on the stock exchange for the first time. The aim is to raise capital for growth and expansion. During the IPO process, companies must meet strict regulatory requirements, submit comprehensive financial reports and obtain approval from the stock exchange supervisory authority. The IPO enables the company to expand its investor base and strengthen its market presence.

SEC

(Securities and Exchange Commission)

The SEC (Securities and Exchange Commission) is the US stock exchange supervisory authority, which was founded in 1934 to regulate the securities markets. Its primary responsibilities are to protect investors, ensure fair, orderly and efficient markets, and facilitate capital formation. The SEC oversees corporate disclosure requirements, enforces securities laws and fights fraud and manipulation in the financial markets. It plays a critical role in overseeing initial public offerings (IPOs), regulating mutual funds, and monitoring exchanges and securities dealers to ensure the integrity of the financial markets.

Units

Units in SPACs (Special Purpose Acquisition Companies) are financial instruments issued during an initial public offering (IPO) by SPACs. A unit typically consists of one common share and a fraction of a warrant. This warrant grants the right to purchase additional shares at a fixed price in the future. This structure provides investors with immediate equity participation and future upside potential. SPACs raise capital to acquire a private company and take it public. The combination of shares and warrants makes units an attractive investment opportunity.

Warrants

Warrants in SPACs are options that give investors the right, but not the obligation, to purchase additional shares at a fixed price in the future. These are often issued as part of units and are a crucial element of the investment structure of SPACs. Warrants offer investors the potential to benefit from future stock price increases. If stock prices rise following the acquisition of a target company, investors can exercise the warrants and buy shares at a price below the current market price, enabling additional profits.

Rights

Rights in SPACs are special privileges granted to investors as part of the IPO or other capital-raising activities. A right entitles the holder to purchase additional shares under certain conditions, usually at a discounted price or upon the merger with a target company. Rights differ from warrants in that they are often automatically converted into shares once certain conditions are met, without requiring any action from the investor. These rights provide additional security and participation potential for investors in the SPAC process.

Merger/De-SPAC

A merger, also known as a De-SPAC transaction, is the process by which a SPAC (Special Purpose Acquisition Company) acquires a target company and takes it public. After the merger is completed, the private company becomes a public entity, with SPAC shareholders receiving shares in the merged company. This process involves thorough due diligence, regulatory approvals, and shareholder votes. The merger provides the target company with access to capital markets and increased visibility, while investors can benefit from potential value appreciation.

Redemption

Redemption in the context of SPACs refers to the right of shareholders to return their shares for a refund of the invested capital, usually at a specified price per share equivalent to the initial IPO price. This typically occurs when shareholders disagree with the proposed acquisition or find the terms unattractive. Redemption offers a safety net for investors by allowing them to limit their risk. It is a crucial mechanism that ensures shareholder interests are protected and that they are not forced into an unwanted investment.

Liquidation

When a SPAC (Special Purpose Acquisition Company) fails to find a suitable target company within the specified timeframe, it must notify its shareholders and redeem all outstanding shares. This process, known as “Full Redemption,” ensures shareholders receive their originally invested capital plus any accrued interest, typically at the initial IPO price per share. This mechanism provides investors with security, ensuring their capital is protected if the SPAC does not achieve its acquisition goals. The redemption process ensures investors are not tied to an unsuccessful SPAC and can reallocate their capital to other investments.

Unit-Split in SPACs

A unit-split in SPACs occurs when the initially issued units, comprising shares and warrants, are separated into individual components. This allows investors to trade shares and warrants independently, providing greater flexibility and liquidity. The split typically happens after the IPO and before the acquisition of a target company.

LOI (Letter of Intent)

A Letter of Intent (LOI) in the context of SPACs is a non-binding document outlining the preliminary terms and conditions of a proposed acquisition between the SPAC and the target company. The LOI serves as a foundation for detailed negotiations and due diligence, signaling a serious intent to pursue the transaction.

Definitive Agreement

A Definitive Agreement in SPACs is a legally binding contract that finalizes the terms and conditions of the merger between the SPAC and the target company. This document includes detailed information on the transaction structure, financial terms, and regulatory requirements. It marks a crucial step towards completing the De-SPAC process.

Warrant Redemption

Warrant Redemption in SPACs is the process by which a SPAC can buy back or force the exercise of outstanding warrants. This typically occurs when the share price reaches a certain level, allowing the SPAC to streamline its capital structure. Investors can either exercise their warrants to buy shares or redeem them for a specified price.