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What Is a SPAC?

David H. Schwartz, INC Oct. 6, 2023

In California and across the United States, a special purpose acquisition company (SPAC) may be formed to raise money through an initial public offering (IPO) in order to purchase or merge with another company. While many investors and companies are often attracted to SPACs, there are various inherent risks and challenges associated with it. If you're considering forming a SPAC, it is beneficial to speak with a seasoned California business litigation professional for assistance. 

With over 45 years of extensive experience, Mr. Schwartz proudly directs clients through the legal challenges involved in business litigation matters. Attorney David Schwartz can inform you about what a SPAC is, its purpose, the formation process, and possible risks. The firm proudly serves clients across San Francisco, California, and surrounding areas of San Jose, Santa Clara, Oakland, San Mateo, Alameda County, and the San Francisco Bay Area. 

What Is a SPAC?

A Special Purpose Acquisition Company (SPAC) is a public shell company established with the major purpose of raising capital through an IPO to ultimately merge or acquire another business.  

Essentially, a SPAC doesn't provide any products or services. Rather, investors will contribute funds through an initial public offering. The capital will then be used to acquire or merge with a private company and take the company public. Due to the structure of the SPAC, they're often referred to as a "blank-check company." 

The SPAC Process

Here's the process involved in creating a SPAC: 

The Formation 

The SPAC is created by a group of investors and sponsors, including professionals at private equity firms, Wall Street investors, or institutional investors – in order to raise investment capital. 

The IPO (Initial Public Offering) Stage 

After forming the SPAC, the sponsors or investors will start raising capital for its own initial public offering (IPO). To make investing in the business more accessible, the SPAC may be offered at $10 per share. 

The SPAC's Search for a Merger Target 

Any capital raised through the IPO will be held in a trust. This will give the investors sufficient time to find a private company to acquire or merge with. Under the law, the SPAC will have between 18 months to two years to identify and acquire or merge with the target private company. 

The Acquisition or Merger 

Once a company has been identified and the acquisition or merger is in motion, the SPAC's investors or sponsors will be able to keep their SPAC shares to buy the shares of the new company at a reduced rate or sell their shares and receive their initial investment. Upon finalizing the acquisition or merger, the private company will go public. 

Why Investors and Companies Are Attracted to SPACs

According to Market Intelligence data, there were 187 SPAC Mergers & Acquisitions deals in 2022, with an aggregate value of $8.85 billion. Here are some reasons why investors and companies find SPACs attractive: 

  • SPACs make it easier to raise investment capital. 

  • SPACs provide opportunities for higher valuations since a public company will trade higher than a private company. 

  • There is more certainty and transparency in the SPAC process. 

  • SPACs have lesser fees and regulatory demands. 

  • A SPAC merger or acquisition is faster and can be completed within 3 or 6 months. 

  • Marketing a SPAC is cost-effective, and investors can raise additional capital. 

However, while SPACs offer various incentives and benefits to investors and private companies, there are some inherent risks involved. 

Potential Risks and Challenges Associated With SPACs

Here are some possible risks and challenges associated with SPACs: 

  • No extensive due diligence, and businesses may be incorrectly valued. 

  • No disclosure of financial projections. 

  • Not knowing the investment strategy of the SPAC during the IPO. 

  • Not knowing the intended target company to be acquired. 

  • Reducing the SPAC's share value to compensate the initial investors and SPAC management team. 

  • Pressure to acquire or merge with a target company within 18 months to 2 years. 

  • There may be a conflict of interest. 

  • Inadequate legal protections 

An experienced attorney can determine whether the SPAC merger is right for your business and help you avoid or mitigate possible risks. 

Get Professional Legal Guidance

Getting acquired or merging with a SPAC offers a feasible option for private companies to go public. Attorney David Schwartz has the diligence and expertise to advise and guide business owners and investors through the complex procedures involved in SPAC mergers and acquisitions. Using his broad knowledge, Mr. Schwartz can walk you through the legal procedures involved, determine whether it is right for your company to proceed with the SPAC merger, and help you make informed decisions. 

Contact the Law Offices of David H. Schwartz, INC, today to schedule a simple consultation with an experienced commercial litigation lawyer. Attorney David Schwartz can offer you the reliable advocacy and legal counsel you need to navigate crucial decisions in your SPAC mergers. The firm proudly serves clients across San Francisco, California, and surrounding areas of San Jose, Santa Clara, Oakland, San Mateo, Alameda County, and the San Francisco Bay Area.