A special purpose acquisition company is a clever bit of financial engineering. A sponsor creates a shell company — the SPAC — that does a public stock offering and sells stock for $10 per share. Let’s say she sells 10 million shares for a total of $100 million. The money goes into a pot, and the sponsor goes and looks for a private company to take public. If she finds one, the SPAC merges with the target company, the target company gets the $100 million and the SPAC’s public stock-exchange listing, and the shareholders of the SPAC get shares of the newly public target company. Or, if they don’t want those shares, they can take back their $10, with interest, when the merger closes. The sponsor generally gets 20% of the SPAC’s shares, for free, as a reward for her efforts; here she would get shares worth about $25 million.
But if the sponsor doesn’t find a target and do a deal by a fixed deadline — generally two years after the SPAC goes public — the SPAC liquidates and hands the money back to its shareholders. In this scenario, the sponsor gets nothing. In fact, she generally loses money. The SPAC has some costs: It has to pay investment bankers for its initial public offering, and then pay for accountants and consultants and a website and whatever as it searches for a target. The $100 million that the SPAC raised from public shareholders can’t be touched to pay these costs: It has to keep that money in trust to use for an acquisition, or to pay back to its investors if it can’t close a deal. The investors have to get their $10 back, generally with interest, though some of the interest can generally be used to cover a few specific costs.