How Does a SPAC Work?

Understanding how a SPAC works means following it from formation to merger or liquidation. Each phase has its own mechanics, filings and decision points for investors. This guide walks through the full lifecycle and what each filing tells you along the way.

Phase 1: SPAC Formation and Structure

The Sponsors

Every SPAC begins with sponsors—executives, investors, or industry experts who create and manage the SPAC through a sponsor entity. Repeat sponsors such as Gores and Churchill Capital have launched many SPACs in numbered series. Sponsor teams typically include:

• Former CEOs or senior executives with industry expertise
• Private equity professionals with acquisition experience
• Investment bankers with capital markets knowledge
• Celebrities or well-known figures who add credibility

Sponsors pay a nominal amount (usually $25,000) for "founder shares," the "promote," which typically represents 20% of the SPAC's post-IPO shares. Separately, the sponsor buys private placement warrants or units to fund IPO costs and working capital. The promote is the sponsor's main compensation and is worth something only if a deal closes.

Initial Capital Structure

The SPAC's initial capitalization includes:

• Founder Shares: 20% of equity owned by sponsors, purchased for minimal investment
• Public Shares: 80% of equity to be sold in the IPO
• Warrants: Additional equity upside included in the IPO units and bought by the sponsor in a private placement
• Forward Purchase Agreements: Commitments from sponsors or third parties to invest at the time of merger

Phase 2: The IPO Process

Filing and Regulatory Review

The SPAC files an S-1 (or F-1 for a foreign issuer) registration statement with the SEC. Since the SEC's SPAC rules took effect in 2024, it must include specific disclosure under Subpart 1600 of Regulation S-K:

• The sponsor, its controllers, and their experience with other SPACs
• The SPAC's investment strategy and target criteria
• Use of proceeds and trust account terms
• All compensation to the sponsor and its affiliates, and the dilution it causes, including a dilution table
• Conflicts of interest between the sponsor, officers and directors and public shareholders
• Risk factors specific to blank check companies

The S-1 also names the underwriters; embarc tracks SPAC underwriters and the deals each has led.

IPO Pricing and Structure

Most SPACs follow a standardized IPO structure:

• Unit Price: $10.00 per unit (industry standard)
• Unit Composition: 1 Class A share plus a fraction of a warrant (typically 1/3 to 1/2), sometimes with a right to receive a fraction of a share at closing
• Warrant Strike Price: Usually $11.50 per share
• Trust Account: $10.00 or slightly more per unit goes into trust, funded by IPO proceeds plus sponsor private placement money; part of the underwriting fee is deferred until a deal closes

Trading Mechanics

After the IPO, SPAC securities trade as follows:

• Units: Trade immediately after IPO (ticker XXXU on Nasdaq, XXX.U on NYSE)
• Separation: Typically 52 days after the prospectus, units can be split into shares and warrants
• Common Shares: Trade under ticker XXX
• Warrants: Trade under ticker XXXW on Nasdaq or XXX.WS on NYSE

Phase 3: The Search Period

Timeline Pressure

SPACs typically have 12 to 24 months from the IPO to complete a business combination, and Nasdaq and NYSE rules cap the total, extensions included, at 36 months. The deadline creates urgency:

• Months 1-6: Building deal pipeline and initial outreach
• Months 6-12: Serious negotiations with potential targets
• Months 12-18: Finalizing deal terms and documentation
• Months 18-24: Completing the merger or seeking extension

Target Identification Process

SPAC sponsors employ various methods to find targets:

• Investment Banking Networks: Leveraging relationships with bankers who know companies considering going public
• Industry Contacts: Using sponsor expertise and connections in specific sectors
• Financial Advisors: Hiring firms to run formal auction processes
• Direct Outreach: Approaching companies that fit the SPAC's criteria

Due Diligence

Once a potential target is identified, the SPAC conducts thorough due diligence:

• Financial audits and quality of earnings analysis
• Legal review of contracts, litigation, and compliance
• Business model evaluation and market analysis
• Management team assessment
• Technology and intellectual property review

Phase 4: The Business Combination (De-SPAC)

Deal Announcement

When a target is selected, the SPAC announces the proposed merger through:

• 8-K Filing: Filed within four business days, with the merger agreement attached
• Investor Presentation: Deck explaining the target's business, filed as a Rule 425 or soliciting communication
• Press Release: Public announcement with key highlights
• Investor Call: Management teams from both companies present the opportunity

PIPE Financing

Most SPAC deals include a PIPE (Private Investment in Public Equity) to ensure adequate cash:

• Purpose: Replace potential redemptions and provide growth capital
• Investors: Institutional investors, mutual funds, hedge funds
• Terms: Often at $10/share, but increasingly with discounts, extra shares, warrants or convertible securities
• Size: Varies widely with the deal; large PIPEs were common in the 2020–2021 boom and have been much smaller since

Proxy Statement and SEC Review

The merger requires extensive documentation:

• Proxy Statement/S-4: Comprehensive document describing the transaction; under the 2024 rules the target company signs the S-4 or F-4 as a co-registrant and takes on liability for it
• SEC Review: Multiple rounds of comments and responses (often 2-4 months)
• Financial Statements: Audited financials for the target company
• Pro Forma Information: Combined financial statements under different redemption scenarios
• Projections: Any projections must carry the bases and assumptions behind them, and since 2024 the PSLRA safe harbor for forward-looking statements does not cover de-SPAC transactions
• Fairness and Conflicts: Whether the board considers the deal advisable and in the best interests of the SPAC, any fairness opinion, and sponsor compensation and dilution

Once a definitive agreement is signed, the target appears in embarc's list of companies merging with a SPAC.

Phase 5: Shareholder Vote and Redemptions

The Shareholder Meeting

SPAC shareholders vote on the proposed business combination:

• Required Approval: Usually a majority of the votes cast
• Sponsor Votes: Sponsors typically vote their 20% in favor
• Quorum Requirements: Often 50% of outstanding shares
• Vote Timing: The proxy must be distributed at least 20 calendar days before the meeting

Redemption Rights

A critical feature of SPACs is the redemption option:

• Right to Redeem: Shareholders can redeem shares for cash from trust
• Redemption Price: Pro rata share of trust (typically $10 plus accrued interest, net of taxes)
• Keep Warrants: Redeeming shareholders often keep their warrants
• Decision Timing: Must elect, usually two business days before the vote, regardless of how the shareholder votes

Minimum Cash Conditions

Most merger agreements include conditions related to available cash:

• Minimum Cash: Target company requires certain cash proceeds
• Maximum Redemptions: Deal may terminate if too many redemptions
• PIPE Backstop: PIPE investors help ensure minimum cash is met

Phase 6: Closing and Post-Merger

Transaction Closing

Upon approval, the merger closes with several simultaneous events:

• Legal Merger: Target company merges into SPAC (or vice versa)
• Name Change: SPAC adopts target company's name
• Ticker Change: New ticker symbol reflecting the operating company
• Board Reconstitution: New board with target company representation
• Capital Infusion: Trust funds and PIPE proceeds delivered to company

Post-Merger Dynamics

After closing, several important changes occur:

• Lock-up Periods: Sponsors and insiders typically locked up for 6-12 months, often with early release if the stock trades above a price threshold
• Earnout Provisions: Additional shares may be issued based on performance
• Warrant Exercises: Warrants typically become exercisable 30 days after closing (or 12 months after the IPO, if later)
• Public Company Requirements: Full SEC reporting and compliance obligations; the company joins embarc's list of completed de-SPACs

Alternative Outcomes

SPAC Liquidation

If no deal is completed within the timeframe, the SPAC liquidates. Even very large SPACs can end this way: Pershing Square Tontine, the largest SPAC IPO, returned its trust without completing a deal.

• Automatic Liquidation: SPAC must return funds to shareholders
• Distribution Amount: Pro rata share of trust plus interest, less taxes and a limited amount for dissolution expenses
• Sponsor Losses: Sponsors lose their founder share and private placement investment
• Warrant Expiration: All warrants expire worthless

Extension Mechanisms

SPACs can extend their deadline through:

• Shareholder Vote: Approval to extend, often up to 6-12 months in monthly increments
• Additional Contributions: Sponsors may add funds to trust
• Monthly Extensions: Some SPACs allow month-by-month extensions
• Redemption Rights: Shareholders can usually redeem during extensions

Key Stakeholders and Their Incentives

Practical Timeline Example

Here's a typical SPAC timeline from start to finish:

Explore the Data

The table below lists SPACs searching for a target now. To follow the rest of the lifecycle:

• Companies merging with a SPAC under a definitive agreement
• Completed de-SPACs
• Failed SPACs that liquidated or withdrew