Special Purpose Acquisition Company (SPAC) Overview

What Are SPACs in Finance?

By Lou Whiteman – Updated Jul 14, 2025 at 1:44 PM EST

Key Points

SPACs merge with private companies to take them public, often without specifying their target in advance.
Investing in SPACs can lead to significant returns when a merger target is revealed, boosting share prices.
Regulatory differences allow SPACs to project future finances, unlike traditional IPOs, adding risk.

A SPAC, or special purpose acquisition company, is another name for a "blank check company," meaning an entity with no commercial operations that completes an initial public offering (IPO).

After becoming a public company, the SPAC then acquires, or usually merges with, an existing private company, taking it public. Before completing a merger or acquisition, many SPACs provide no indication to investors about the type of company they plan to merge with or buy.

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Bundle of dollars and a bag that says SPAC on a seesaw balance.. — Image source: Getty Images.

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In effect, the "special purpose" of a SPAC is to bring a promising private company to the public investment market. Although SPAC strategies can be complicated, they tend to take less time to complete than traditional IPO listings and can be cheaper. The advisory fees associated with going public via a SPAC tend to be much less than the fees charged for a traditional IPO.

Early-stage companies can more easily comply with the requirements to merge with a SPAC than to complete an IPO.

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Once a deal is announced, the de-SPAC transition begins. There is usually time between a formal merger announcement and the close of a deal when investors vote on the deal and other legal matters are resolved.

One of the first high-profile SPAC deals featured Richard Branson's space tourism start-up Virgin Galactic (SPCE -3.22%). In late 2019, venture capitalist Chamath Palihapitiya formed a SPAC called Social Capital Hedosophia Holdings. The SPAC merged with Virgin Galactic, taking it public.

Shareholders of Social Capital Hedosophia Holdings received a 49% stake in the combined company, while Virgin Galactic received about $800 million in cash and a public ticker allowing it to trade on a stock exchange.

SPACs generally have between 18 and 24 months to find a merger partner after raising money. If they do not, the funds held in the trust account are returned to investors.

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Expert views on SPACs

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SEC (Securities and Exchange Commission)

The SEC, or Securities and Exchange Commission, is an independent government agency responsible for ensuring the integrity of the capital markets in the United States.

If nothing else, investors should be aware that the rules are different than with an IPO.

The traditional IPO process is cumbersome and restrictive, partly to ensure individual investors are protected. Investors invariably lose some protections when they invest in SPACs. Investing in younger, less-established companies carries greater upside potential but also greater risk.

A cautionary tale is the SPAC merger deal between VectoIQ (NASDAQ:VTIQ) and electric truck start-up Nikola (NASDAQ:NKLA). VectoIQ shares rapidly increased in value in March 2020 when the merger deal was announced, and they were up by more than 600% by midsummer of 2020. Later in the summer, after the merger closed, questions surfaced about the viability of Nikola's products.

By June 2023, shares of Nikola were trading for less than $1, and the company's market capitalization was less than $400 million -- 99% less than the stock's all-time high.

It's impossible to know whether an IPO would have raised enough red flags about Nikola for investors, but in hindsight, clearly insufficient due diligence was conducted before the SPAC merger was completed.

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About the Author

Lou Whiteman is a contributing Motley Fool stock analyst covering aerospace, defense, transport, manufacturing, specialty finance, and bank stocks. Previously, Lou was a financial analyst and senior writer for TheStreet, a venture capital specialist for The Deal LLC, and a high school personal finance teacher. He holds a bachelor’s degree in communications from Loyola University Maryland and completed a fellowship at the ABA Stonier Graduate School of Banking.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.