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Special Purpose Acquisition Companies (SPACs), also known as 'blank cheque' or 'shell' companies, have no commercial operations. They're created solely to raise capital to acquire another company or list on stock exchanges, aiming to attract potential investors for future ventures.

An active company can then merge with, or be acquired by the SPAC and become a listed company itself, instead of executing its own traditional Initial Public Offering (IPO).

Traditional IPOs can take a year or more, while using a SPAC is often faster. SPACs are created specifically to complete a merger, or for share exchange, asset acquisition, share purchase, reorganisation, or similar business combination with one or more companies.

From establishment, the SPAC usually has 24 months to complete the entire acquisition process.

There are many steps, but the main ones involve:

• searching for a target company to acquire
• negotiating a takeover agreement
• holding investor meetings and seek shareholder approval
• executing the merger
• if no merger is completed within the set timeframe, the SPAC is liquidated and funds are returned to public shareholders

This last step of creating the listed successor company is referred to as a 'de-SPAC' transaction.

After the SPAC completes a merger with a target company, the previously privately held company will become publicly listed. The stock ticker for the SPAC is changed to reflect the name of the acquired company and with this it will start trading on the selected exchange.

A SPAC is a high-risk investment. SPACs have recently been very popular with investors around the world. However, this investment carries risks due to several factors (outlined below).

The SPAC may fail to identify a target company within the required time period (typically 24 months) and have to return funds to its investors, causing no return to be achieved over the period that the capital was invested.

Rising SPAC competition can push them to target early-stage companies, increasing investment risk, especially in sectors like emerging tech. These firms often have limited financial history, evolving controls, and rely on projections. They must meet public company requirements post-merger.

Sponsors and directors of SPACs may have personal interests that compete with the best interests of public shareholders.

Investors must place a great deal of trust in the SPAC’s management team to find the best target company for a merger since some parties may be financially incentivised to ensure that the SPAC completes a merger within the limited time available.

In contrast to an IPO, there is no underwriter in the SPAC’s merger process, so the comprehensive due diligence which is usually associated with a company going public may not be carried out.

SPAC sponsors have a strictly limited time to close a deal, which could influence the effectiveness of their acquisition research, especially when it is not guaranteed that the sponsor or management team has continued involvement in the target company post-merger.

Because of this time constraint, the SPAC founders may focus on their ability to close a transaction rather than the suitability of the target company going public.