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September 29, 2020
Special Purpose Acquisition Company Initial Public Offering:
Background and Policy Issues
A special purpose acquisition company (SPAC) is a type of
account within 36 months. If the acquisitions cannot be
“blank-check” company that raises capital through initial
completed within that time, the SPAC must file for an
public offerings (IPOs) with the intention to use the
extension or return the funds to investors. At the time of the
proceeds to acquire other companies at a later time. Unlike
de-SPAC transaction, the combined company also must
traditional IPOs, SPACs do not have commercial operations
meet stock exchange listing requirements for an operating
at the time of the IPO, explaining why they are referred to
company. The NASDAQ and the New York Stock
as blank-check or “shell” companies.
Exchange are two common exchanges for SPAC listings.
SPACs first appeared in the 1980s but have gained
Figure 2. How Does a SPAC Work?
popularity in recent years, especially in 2020 during the
Coronavirus Disease 2019 (COVID-19) pandemic (Figure
1). Between January 1, 2020, and August 21, 2020, U.S.
SPAC IPOs raised a record $31 billion through 78
transactions. SPAC IPOs reportedly outpaced traditional
IPOs in July 2020 and August 2020. As SPACs
increasingly take center stage, this In Focus explains how

SPACs work and briefly reviews some policy implications.
Source: NASDAQ.
SPAC IPO Versus Traditional IPO
Figure 1. SPAC IPO Transaction Summary
IPOs are common methods for companies to raise funds
count (left axis) and gross proceeds (right axis, $billions)
and gain trading liquidity for their equity stakes. A SPAC
IPO and a traditional IPO have similarities. Both are public
securities offerings in which company ownership shares are
sold to the public for the first time. Both types of IPOs
involve underwriting and SEC registration and disclosure
processes and generally result in the listing of shares on
stock exchanges. Through the IPO process, a privately held
company becomes a public company, allowing the trading
of its shares among broad investor pools made up of both
institutional and retail (individual) investors. SPACs are
different from traditional IPOs in other ways.
Investment Uncertainty. SPAC investors place trust in
the sponsors to identify acquisition targets. They do not

know the details of a SPAC’s future investment at the
Source: CRS, based on data from Bil Gurley, Benchmark Capital.
time of its IPO. In contrast, investors in a traditional IPO
Note: 2020 data as of August 21.
purchase shares in a specific operating company.
How Does a SPAC Work?
Unit Structure. SPACs often are sold in units, with
SPAC sponsors generally raise money in IPOs for future
each unit consisting of one share of common stock and
acquisitions of other private companies. Because finding
some fraction of a warrant to purchase a certain volume
acquisition targets can take time (typically two years), the
of common stock in the future. After the SPAC IPO,
cash is held in a trust while the sponsors look for a target.
investors can trade units, shares, and warrants
After the SPAC completes a merger, the previously
separately.
privately held target company becomes a publicly listed
operating company. This last step of creating the listed
Speed and Regulatory Scrutiny. SPAC IPOs are faster
successor company is referred to as a “de-SPAC”
and face less regulatory scrutiny, largely because SPAC
transaction (Figure 2).
IPOs do not yet have business operations. Their
financial and business disclosures are substantially
According to Securities and Exchange Commission (SEC)
shorter than traditional IPOs.
rules, a SPAC must keep 90% of its IPO gross proceeds in
an escrow account through the date of acquisition. The
De-SPAC Process. After SPAC sponsors identify an
SPAC should complete acquisitions reaching an aggregate
acquisition target, shareholders have the right to choose
fair market value of at least 80% of the value of the escrow
https://crsreports.congress.gov
Special Purpose Acquisition Company Initial Public Offering: Background and Policy Issues
either to stay with the deal or redeem their SPAC
interview that the agency is critically evaluating SPAC
common stock for a pro rata share of the funds in
disclosures, especially certain compensation disclosures.
escrow. The SEC requires SPACs to file material
disclosures (a so-called “super 8-K”) within four
Investor Protection. SPAC IPO investors purchase their
business days following the completion of a de-SPAC
shares without knowing the future target companies; if the
transaction. The super 8-K contains key financial and
investors do not like the proposed acquisition during the de-
business information about the acquisition target.
SPAC process, they can get their money back. Some are
concerned that a lack of transparency and investor and
Target Company Pricing. The SPAC sponsor offers a
regulatory scrutiny could be risky for investors. SPACs’
fixed price for a target operating company’s equity
challenging past gives rise to this concern. Reportedly, they
shares. This pricing mechanism is different from a
have been associated with fraud but recently have gained
traditional IPO’s pricing, which is flexible and based on
traction as more reputable institutions have embraced them.
market demand for the company. Thus, SPAC targets
may enjoy more certainty for funding and price than
Performance Records. In the past, SPACs had a reputation
would be the case in traditional IPOs.
for underperforming traditional IPOs and other market
benchmarks. Performance records, however, are mixed.
The Promote. SPAC sponsors usually are compensated Some industry research reportedly shows that, for the
by founder shares that convert into public shares during
SPACs that completed de-SPAC transactions between 2015
a de-SPAC transaction; they also may receive warrants.
and July 2020, their shares delivered an average loss of
This compensation, called the promote, often represents
18.8%. That compares with the average after-market return
as much as 20% of the value of a SPAC’s post-IPO
from traditional IPOs of 37.2% since 2015. University of
common shares. The promote, which does not exist for
Florida finance professor Jay Ritter calculates that from
traditional IPOs, could be dilutive to shareholders,
2010 to 2017, SPACs underperformed the broader market
meaning it can reduce shareholder payouts.
by about 3% annually in the first three years after their
IPOs. He attributes that underperformance to the period of
SPACs and the COVID-19 Environment
time when the cash was in escrow accounts returning low
The COVID-19 pandemic has caused business closures,
interest rates while the market was rising. Other Bloomberg
record unemployment, and a volatile stock market. The
analysis shows that since 2017, SPACs have more closely
uncertainties and flexibilities embedded in the SPAC
tracked traditional IPO performance, especially for the
structure appear to address some of the unique needs of an
larger SPAC IPOs. Each SPAC is different, and the
uncertain environment.
industry is still evolving. As such, case-by-case analysis
could also be important.
In such an economic environment, investors face challenges
in accurately assessing business prospects and future
Incentive Structure. SPAC sponsors’ promote is typically
earnings. SPACs can help address this as the sponsors work
high and not contingent upon meeting financial targets.
as intermediaries to identify investment opportunities for
Some believe that because of the pressure to construct a de-
investors. The SPAC structure affords sponsors the
SPAC within a specified period of time, some SPAC
flexibility to receive funding first and seek optimum timing
sponsors, in order to book the promote, may be more
for listing target companies later. In 2020, SPACs have
interested in getting any deal done (rather than getting a
been relatively large and often led by well-known sponsors
good deal done). Additionally, the size of the SPACs’
with long investment track records to gain investor trust.
promote draws concern for some. For example, Opendoor’s
$4.8 billion de-SPAC transaction, which included $414
Private target companies also can find SPACs attractive
million in SPAC IPO proceeds, awarded the sponsors $60
because SPACs provide price certainty and faster access to
million in shares. The size of the typical sponsor
funding (relative to a traditional IPO), factors that are
compensation reduces investor payouts. There are also
especially important during periods of market volatility.
signs of the industry developing new incentive structures to
Some target companies also may find partnering with
attract investors. For example, the largest ever SPAC IPO,
experienced SPAC sponsors potentially beneficial for
Pershing Square Tontine Holdings, paid a different sponsor
enhancing company value.
fee. Instead of the typical 20% founder shares, it elected to
tie the compensation to performance goals, mostly through
Policy Issues
warrants exercisable at 20% above the IPO price.
SPACs raise several policy issues for Congress and the
SEC, including regulatory treatment, investor protection,
Exchange Listing Standards. Because of SPACs’
exchange listing standards, and their perceived
increased popularity in recent years, stock exchanges have
underperformance coupled with high sponsor fees.
tried to relax SPAC rules to attract listings. For example,
the exchanges proposed reducing certain SPAC public
Regulatory Treatment. As SPACs grew from a market
shareholder thresholds, but the SEC rejected the proposals.
niche to a popular alternative to traditional IPOs within a
Some argue that loosening SPAC listing standards might
short period of time, questions arose regarding the equitable
lower the bar for investor protection.
regulatory treatment of SPACs and traditional IPOs for
certain similar activities. Many market participants view
Eva Su, Analyst in Financial Economics
SPACs as an easier or “backdoor” entry into a public
listing. SEC Chairman Jay Clayton said in a recent
IF11655
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Special Purpose Acquisition Company Initial Public Offering: Background and Policy Issues


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