SPACs: How Special Purpose Acquisition Companies Work and What to Watch For

How a SPAC IPO Works: Units, Shares, and Warrants

A SPAC IPO typically sells units at $10.00 per unit. Each unit usually consists of one common share plus a fraction of a warrant (often one-half or one-third of a warrant) that allows the holder to purchase additional shares at $11.50 per share after the business combination. After the IPO, the units separate into shares and warrants, which trade separately on the exchange. The proceeds from the IPO are placed in a trust account, typically invested in US Treasury securities, earning interest that accrues to the benefit of public shareholders. The SPAC sponsors (the management team) generally receive 20% of the total shares outstanding for a nominal investment (often $25,000), creating significant dilution for public shareholders. This sponsor promote is one of the main reasons SPACs have underperformed — the sponsors' 20% stake dilutes the value of public shares by 20% from day one. Additionally, the warrants, if exercised at $11.50 per share, further dilute shareholders when the stock price exceeds that threshold. How warrants work in SPAC structures →

The De-SPAC Process: Finding and Merging with a Target

The de-SPAC process begins when the SPAC management identifies a private company to acquire. The SPAC announces the proposed merger, including the valuation, the terms of the transaction, and the projected financial performance of the target. Shareholders then vote to approve the merger. Public shareholders who do not like the target can redeem their shares for the trust value (typically $10.00 to $10.20 per share) regardless of how they vote. This redemption right is a unique feature of SPACs that provides downside protection. After shareholder approval, the merger closes and the combined company begins trading under a new ticker symbol. The target company receives the cash from the trust (minus redemptions) plus any additional financing raised through a PIPE (Private Investment in Public Equity) that often accompanies the merger. High redemption rates — sometimes exceeding 80% — indicate that most public shareholders did not approve of the target valuation, leaving the merged company with significantly less cash than anticipated. Private equity and SPAC deal structures →

SPAC Performance Data: How Most Have Done

The empirical data on SPAC performance is sobering. A 2023 study by the SEC found that SPAC investors who held through the merger lost an average of 40% of their investment within two years of the business combination, compared to a 20% gain for the Russell 2000 over the same period. Only about 15% of SPACs that completed mergers between 2020 and 2022 traded above their $10 IPO price 12 months after closing. Over 50% traded below $5. The reasons for this underperformance include: sponsor compensation (20% dilution), aggressive revenue projections that targets failed to meet, high redemption rates, and the fact that many companies that chose SPAC routes did so because they could not qualify for a traditional IPO. The SEC also noted that SPAC sponsors had incentives to complete any merger rather than no merger (to keep their promote), leading to poor target selection. Of the 2020 vintage SPACs, approximately 30% liquidated without a merger and another 50% had negative returns for investors who held through the de-SPAC transaction. Value investing principles for evaluating SPAC targets →

Risks and Red Flags in SPAC Investing

SPAC investing carries unique risks beyond those of traditional stock investing. Sponsor alignment risk: sponsors may push through a bad deal because they only keep their promote if a merger closes. Valuation risk: target companies often make aggressive growth projections that fail to materialize, and the SPAC structure allows for less rigorous due diligence than a traditional IPO. Dilution risk: the sponsor promote (20% of shares) plus warrants can dilute public shareholders by 30% to 50% or more. Redemption risk: if a SPAC announces a bad deal and most shareholders redeem, the merged company may lack sufficient capital to execute its business plan. Lock-up risk: early investors and PIPE investors may sell their shares as soon as lock-up periods expire, flooding the market with supply. Regulatory risk: the SEC has proposed new rules to tighten SPAC disclosure requirements, including more detailed projections, stricter liability standards, and rules that would remove the safe harbor for forward-looking statements. These risks mean that SPAC investing requires significantly more due diligence than buying an established public company. Risk management principles for SPAC investors →

Are SPACs a good investment?

The data suggests that SPACs have been a poor investment for most public shareholders. As of 2026, the average SPAC that completed a merger between 2020 and 2022 trades at approximately 60% below its IPO price. Only a handful of SPACs — notably DraftKings, which merged with Diamond Eagle Acquisition Corp in 2020 — have generated positive returns for investors who held through the merger. However, a strategy of buying SPAC units at the IPO and redeeming before the merger (capturing the interest earned in the trust) has generated consistent modest returns, typically 0.5% to 2% annualized, depending on interest rates. For most retail investors, the best approach is to avoid investing in SPACs after the merger announcement and instead focus on established companies with proven business models. The SPAC structure inherently creates misaligned incentives between sponsors and public shareholders, making it difficult for retail investors to achieve positive risk-adjusted returns.

What happens to my SPAC shares if no merger happens?

If a SPAC fails to complete a merger within its specified timeframe (typically 18 to 24 months, extendable by shareholder vote), the SPAC must liquidate and return all trust proceeds to public shareholders. The liquidation typically returns $10.00 to $10.20 per share (the initial IPO price plus interest earned on Treasury securities). This is the primary downside protection in SPAC investing — you get your money back even if no deal is completed. However, if you bought SPAC shares in the secondary market above $10 (which many traded at during the 2020-2021 SPAC frenzy), you could lose money on liquidation. During the SPAC boom of 2020-2021, many SPACs traded at $12 to $15 or higher based on speculation about potential targets. When those deals failed to materialize, the shares gradually declined toward the $10 trust value, and investors who bought above $10 absorbed significant losses.

How are SPAC sponsors compensated?

SPAC sponsors are compensated primarily through the promote — typically 20% of the SPAC's outstanding shares, which they purchase for a nominal amount (often $25,000 or approximately 2% of the total trust amount). If the SPAC successfully completes a merger, the promote shares convert into shares of the merged company, giving the sponsors a 20% ownership stake for a tiny fraction of the trust value. This promote structure is the central conflict of interest in SPACs: sponsors lose everything if no merger happens (their promote is worthless), but profit enormously if any merger closes, even a bad one. In addition to the promote, sponsors may receive performance-based earnout shares if the merged company's stock reaches certain price targets. Some sponsors have voluntarily reduced their promote to attract investors, particularly after the 2022 SPAC downturn. The typical sponsor promote of 20% means that every SPAC merger is, from day one, 20% overvalued relative to the cash contributed by public shareholders.

What is a SPAC warrant and how does it work?

A SPAC warrant is a security that gives the holder the right to purchase common shares at a fixed price (typically $11.50) after the business combination is completed. Warrants are often included as part of the IPO unit to make the offering more attractive to investors. After the IPO, warrants and shares trade separately. SPAC warrants typically expire 5 years after the merger and can be exercised for cash or on a cashless basis depending on the terms. Warrants are more volatile than common shares — if the post-merger stock trades at $15, the warrant (strike $11.50) has intrinsic value of $3.50. If the stock trades at $10, the warrant has zero intrinsic value and trades only on time and volatility premium. Most SPAC warrants become worthless because the stock trades below $11.50 after the merger. The dilutive effect of warrants means that if all warrants are exercised, existing shareholders' ownership is reduced by 10% to 30% depending on the specific terms of each SPAC.

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