SPAC is a acronym for a Special Purpose Acquisition Company, essentially a publicly traded firm that has no operations, no resources – other than a war chest of cash — and only one stated business plan: to finally purchase another corporation.
A SPAC is usually made by a group of investors, called patrons, with a solid background in a particular business or business sector. They raise funds from other investors, and use the money to obtain a present, privately held firm — then take it public in an IPO.
When they launch the SPAC, the sponsors generally either do not have a specific target in your mind, or they are not prepared to name it in order to prevent the extensive paperwork and disclosures required by the Securities and Exchange Commission (SEC).
The early-bird underwriters and institutional investors, and the individual investors who normally come in later, typically have no idea precisely how the patrons will devote the cash. So early investors are essentially relying on the sponsors’ reputation in the hope of snagging a good investment.
But they’ve got to be prepared to wait. Even after a SPAC goes people, it can take around two years to select and announce the goal company it wants to acquire, or technically speaking, merge with (the corporate charter specifies the specific time period, per SEC regulations).
All this uncertainty is one reason why the majority of SPACs trade at just $10 a share. Of course, the assumption is that if, and when, they acquire a business and take it public, the share prices will soar. At this point, investors can cash out, or continue for longer-term profits.