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The money raised by the SPAC through an IPO is placed in an interest-bearing trust. This trust must be used to acquire or merge with another company within two years, or the funds have to be returned with interest to the investor.

Since SPACs don’t have products or provide services, their expertise lies in knowing which companies to buy and how to navigate the complicated process of issuing IPOs.

SPACs are formed and managed by sponsors. Sponsors are typically investors with expertise in a particular industry or sector looking to create a SPAC to acquire a privately held company. Sponsors are responsible for creating the SPAC, navigating the IPO process, securing investment, and identifying and merging with target companies. They invest the capital required to cover a SPAC’s operating costs in the form of non-refundable payments to bankers, lawyers, and accountants. They’re also responsible for identifying and merging with a target company within two years of the SPAC being established. If they can’t complete a merger, sponsors will need to dissolve the SPAC and return any funds raised through the issuance of an IPO to investors. If the SPAC is successful, sponsors earn sponsors shares in the combined corporation that can be worth as much as 20% of the equity obtained from investors. However, if the SPAC isn’t successful, sponsors stand to lose all the time and money they’ve invested. 

SPACs allow investors to get in on the ground floor by investing in a company when it first goes public.

Institutional investors highly specialized in hedge funds make up the majority of SPAC investors. Investors choosing to buy SPAC shares before a target company has been identified need to trust that sponsors will limit their targets to the size, valuation, industry or geography outlined within the SPACs IPO materials, even though sponsors are not obligated to do so.

Investors receive common stock and may receive warrants allowing them to buy additional shares in the future at a pre-determined price. The number of warrants a SPAC issues can significantly affect an investor's willingness to invest. Some SPACs provide investors with one warrant for every common share purchased. Others issue fractions (often one-half or one-third) or don’t issue any warrants to investors at all. While issuing warrants can provide investors with an additional incentive to invest, SPACs that issue a high number of warrants are perceived to present more risks than SPACs that don’t.

Once a sponsor announces an agreement with a target company, original investors can choose to accept the merger or have their initial investment returned to them with interest. They’re also able to keep any warrants they were issued, even if they ask for their initial investment to be returned. If they aren’t interested in owning shares in the company being acquired, they can ask for their initial investment to be returned along with any interest and warrants earned.

SPACs provide investors with a number of ways to earn a return on their investment. These investors aren’t necessarily interested in owning shares in the future company or obtaining significant returns on their investment. They choose to invest in SPACs that provide higher returns than they’d stand to gain by investing in Treasury or AAA corporate bonds, and by selling any warrants they were issued based on their initial investment.

SPACs typically offer the following classes of securities:

Most SPACs target start-up firms that have been through the venture capital process. These firms are typically looking for ways to generate additional investment by pursuing a traditional IPO, conducting a direct IPO listing, selling the business to a private equity firm or another business, or raising capital from private equity firms, hedge funds or other institutional investors. SPACs provide these firms with another option. SPACs can be highly customizable and support a number of combination types. SPACs can also roll up multiple targets, although they typically acquire a single company, and can take companies public in the United States that are already public overseas. They can even combine multiple SPACs to take one company public.

SPAC IPOs typically focus on a sponsor’s particular background and experience or a particular sector and geography, like trying to acquire a North American technology firm. Proceeds earned from an IPO are placed into a trust account and SPACs typically have 18-24 months following the IPO to identify and merge with a target company. If the SPAC cannot complete a merger within that time, the SPAC is dissolved and the proceeds earned from the IPO are returned to its shareholders along with any interest earned on the initial investment.

Once a target company is identified and a merger is announced, SPAC shareholders can elect to reject the merger and redeem their shares. If additional funds are required to complete the merger, the SPAC can issue additional shares, such as private investment in a public equity (PIPE) deal, or issue debt.

SPACs typically need shareholder approval of any proposed merger. SPACs typically obtain that approval by preparing and filing a proxy statement or a joint registration and proxy statement on Form S-4 if it intends to register new securities as part of the merger. This document will outline the various matters requiring shareholder approval, such as details of the proposed merger and various governance matters. It will also include information about the target company’s finances, such as the company’s historical financial statements, management’s discussion and analysis (MD&A), and pro forma financial statements showing the effect of the proposed merger.

If the proposed merger is approved by shareholders, and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity. A Form 8-K, with information equivalent to what would be required in a Form 10 filing of the target company (commonly referred to as the Super 8-K), must be filed with the U.S. Securities and Exchange Commission (SEC) within four business days of closing.

SPACs can be beneficial for both investors and the company that is being acquired. Merging with a SPAC allows the company being acquired to focus on their core competencies, while leaving the heavy lifting associated with raising funds for an IPO to the SPAC.

SPACs provide privately held companies with a number of benefits, compared to traditional IPOs.

SPACs often:

However, there are a few things to consider before investing in SPACs:

While investing in SPACs has been limited to highly specialized hedge fund managers and other large institutional investment firms, they are becoming popular with individual investors.

In recent times, high-profile SPACs have captured the interest of both institutional and retail investors. However, as SPACs tend to provide lower returns, there can be some hesitation around investing in them.

As a self-directed investor, you can invest in SPACs with TD Direct Investing.

Then simply wait for the SPAC to announce the target company it will be acquiring or merging with. Once the acquisition or merger is complete, you have the option to either stay invested or sell.