What is a SPAC and how is it set up?

A special purpose acquisition company, or SPAC, is shell company that raises capital from large investors with the purpose of acquiring a private company. These investors are called sponsors. Once the shell company has raised enough capital from its sponsors, it is listed on a stock exchange, where its shares can be traded normally. In the United States, SPACs are usually listed at a price of 10 dollars per share, whereas SPACs in Finland have been listed for 10 euros per share. After the listing, the share price is determined by the market as the shares become available for trading. 

What happens after a SPAC is founded?

Once the SPAC is listed, its only purpose is to acquire another, unlisted company using the cash raised from its sponsors and the public. Once a suitable unlisted company is found, the SPAC will acquire it. Following the acquisition, the SPAC’s shares are converted (exchanged) into the shares of the acquired company, as a result of which the shareholders of the SPAC become shareholders of the acquisition target. In this process, the acquired company is merged into the SPAC and its shares become tradable on the stock exchange. For an unlisted company, this is a quicker way of raising capital and getting its shares listed for public trading.

Participate in SPAC IPOs in Nordea Investor

You can subscribe for shares through Nordea Investor during the initial public offering (IPO), and have them recorded on your book-entry account or equity savings account. Please read the IPO documents carefully before subscribing.

Read about stock exchange listings and initial public offerings (IPOs) more generally.

What is in it for me?

Just like the listing of a “normal” equity you are able to buy the SPAC  in the early stage of the listing. You are able to attend the listing phase of the shell company (the SPAC) just like with a normal IPO. When the SPAC is listed you are able to buy shares in the shell company on the market and wait for possible future conversion. In the conversion phase you generally know how many shares you receive in the acquired company. Let us say that you buy 100 shares in a SPAC. If it finds a company to acquire you usually get equal amount of shares in the new converted company. Of course it can be different case by case and it is stated in the terms and conditions. 

What are the risks involved?

Investors in a special purpose acquisition company (SPAC) have to rely on the previous track record and investment criteria of the company’s sponsors because the company has no previous operating history. So when investing in a SPAC, you should carefully find out who the company’s sponsors are and what they have previously achieved.

A SPAC usually has a very small organisation and it has no income and can’t generate any profit. For this reason, it’s difficult for potential investors to assess the risks and expected returns of the company. It’s also crucial that you carefully read the SPAC’s listing prospectus. Before finding a company to acquire, a SPAC is, for all intents and purposes, a pile of cash listed on the stock exchange searching for something to buy.

It’s also important to note that a SPAC is set up for a limited period of time, usually 24–36 months. It must find a company to buy out within this period, or else it will be dissolved and the cash it has collected will be returned to its shareholders, minus expenses. For example, if you bought a SPAC listed on the Helsinki Stock Exchange for 10.50 euros per share and the company fails to buy a company to acquire within the set period, you would be reimbursed 10.50 euros minus expenses and your loss would be equal to those expenses.  

There are no guarantees that a suitable acquisition target can be found on time, which is something to keep in mind. Another thing you should be prepared for is that potential rumours about the company to be acquired as well as about the outcome of acquisition negotiations can cause large swings in a SPAC’s share price.

Key risks

When investing in a SPAC, you’re exposed to the risks involved in business acquisitions. Buying another company is always a long, complex and costly process. The costs of the process are paid by the SPAC even if the business acquisition is not completed. In such a case, these costs would have a negative impact on the value of the SPAC and on potential future business acquisitions. The great risks involved in a business acquisition also impact the company to be acquired. The success of the business acquisition is largely dependent on the competence of the SPAC’s sponsors.

Another risk is that the acquired company isn’t granted permission to list its shares for public trading. The acquired company must also meet the requirements of the stock exchange and local legislation. Potential additional demands by the authorities or the stock exchange could result in delays and additional costs to the acquisition.

The shareholders of the SPAC have little influence over the selection of the acquired company. However, before a business acquisition can be completed, the SPAC must seek approval for it at a general meeting of the shareholders. 

In such a meeting, every shareholder can vote on the company to be acquired in proportion to their shareholding. Shareholders of the SPAC who don’t accept the acquisition target usually have the option of redeeming their shares at a predetermined price minus expenses. This price is usually the SPAC’s IPO listing price but you can find more detailed information on it in the SPAC’s listing prospectus.

Read the listing prospectus carefully

Investors should carefully read a SPAC’s listing prospectus before making a final investment decision if they intend to invest in the company through its IPO. On the other hand, if you plan to buy shares once they are publicly traded, you should carefully read the SPAC’s regularly published reports before making your investment decision. 

In general, it’s important that you know the companies you invest in. Although SPACs are structurally similar to one another and their listing is subject to certain minimum requirements of the stock exchange, it’s crucial to understand the various features of a specific SPAC, including the interests of its sponsors.