What Are SPACs and Do They Work?
A Special Purpose Acquisition Company is a publicly listed shell company that raises capital through an IPO with the sole purpose of acquiring a private company, thereby taking it public without a traditional IPO process. SPACs are sometimes called "blank check companies" because investors commit capital before knowing which company the SPAC will ultimately acquire. The structure has existed since the 1990s, but it exploded in popularity during 2020 and 2021, when more than 600 SPACs went public in a single year and the total capital raised exceeded $160 billion. The aftermath provided a clear picture of whether the structure works for investors.
How a SPAC Works
The SPAC lifecycle has four stages: formation, IPO, target search, and business combination.
Formation. A SPAC is created by a sponsor, typically a group of experienced investors, private equity professionals, or industry executives. The sponsor establishes the SPAC as a corporation, puts up a relatively small amount of capital (usually 2% to 3% of the total raise), and assembles a management team.
IPO. The SPAC conducts an IPO, selling units at a standard price of $10.00 per unit. Each unit typically consists of one common share and a fraction of a warrant (often one-half or one-third of a warrant). The warrant gives the holder the right to purchase additional shares at $11.50 at a future date. The IPO proceeds are deposited into a trust account and invested in Treasury securities until a business combination is completed.
Target search. After the IPO, the SPAC's management team searches for a private company to acquire. The SPAC typically has 18 to 24 months to complete a deal. If no deal is completed within this window, the SPAC must liquidate and return the trust proceeds to shareholders (with interest).
Business combination (de-SPAC). When the SPAC identifies a target, it negotiates an acquisition. The deal is announced publicly, shareholders vote on whether to approve it, and shareholders who do not approve can redeem their shares at the trust value (approximately $10 plus accrued interest). If approved, the acquisition closes, and the combined entity trades as a public company. The SPAC's shares convert into shares of the new company, and the SPAC ticker changes to the operating company's ticker.
The Sponsor's Economics
The sponsor's compensation structure is the single most important feature of the SPAC for understanding investor outcomes.
The promote. The sponsor typically receives 20% of the SPAC's outstanding shares (after the IPO) for a nominal investment, usually $25,000 for a $200 million SPAC. These are called "founder shares" or the "promote." If the SPAC completes a deal, the sponsor's shares convert into shares of the combined company, typically worth tens or hundreds of millions of dollars.
This means the sponsor earns enormous returns even if the deal only modestly destroys value for other shareholders. On a $200 million SPAC, the sponsor's 20% promote is worth $40 million at the IPO price. If the combined company's stock drops 30% after the deal closes, the sponsor's shares are still worth $28 million on an initial investment of $25,000. The other shareholders have lost 30% of their capital.
Warrants. The sponsor also receives warrants, which represent additional upside if the stock appreciates. The sponsor's warrants are typically exercisable at $11.50, and the dilution they create when exercised further reduces the value available to other shareholders.
Alignment problem. The sponsor has an enormous incentive to complete a deal, any deal, rather than liquidate the SPAC and return capital. Liquidation means the sponsor's founder shares are worthless. Completing a deal, even an overpriced one, makes the promote valuable. This misalignment of incentives is the structural flaw at the heart of the SPAC model.
The 2020-2021 SPAC Boom
Several factors converged to produce the SPAC boom:
Low interest rates. Near-zero rates reduced the opportunity cost of parking cash in a SPAC trust. The "downside protection" of redemption at $10 per share was more attractive when alternative safe investments yielded nothing.
Celebrity sponsors. SPACs attracted sponsors from far beyond the traditional private equity world. Athletes (Shaquille O'Neal, Serena Williams), entertainers (Jay-Z), politicians (Paul Ryan), and executives with limited acquisition experience launched SPACs. The credentialing standards for SPAC sponsors effectively disappeared.
Retail investor enthusiasm. The speculative fervor of 2020-2021 extended to SPACs. Retail investors bought SPACs on rumors of potential targets, sometimes driving prices to $15 or $20 before any deal was announced. Social media amplified SPAC hype and created a feedback loop of buying and promoting.
Private company demand. Many private companies, particularly in electric vehicles, space, and fintech, wanted to go public but could not meet the scrutiny of a traditional IPO. SPACs offered a faster, less rigorous path with the ability to include forward-looking revenue projections (which are prohibited in traditional IPO prospectuses).
At the peak, in the first quarter of 2021, SPACs raised more capital than traditional IPOs. The market felt like it was permanently changing the structure of how companies go public.
The Bust
The performance data tells the story of what happened next.
A study by researchers at Stanford and NYU examined SPAC returns from 2019 to 2023. They found that the median SPAC that completed a merger delivered returns of approximately -50% in the first year after the deal closed. For SPACs that completed deals in 2021, the median one-year return was worse: approximately -60%.
The SPACresearch.com database tracks aggregate SPAC performance. As of 2024, the majority of SPACs that completed deals during the boom traded below their $10 IPO price. Hundreds traded below $2 per share. Dozens had gone to zero through bankruptcy.
High-profile SPAC mergers became cautionary tales:
Nikola Corporation went public through a SPAC in 2020 at an implied valuation of $3.3 billion. Its founder was later convicted of fraud. The stock declined more than 95% from its peak.
Lordstown Motors merged with a SPAC in 2020 and went bankrupt in 2023. Shareholders lost virtually everything.
Virgin Galactic went public through a SPAC sponsored by Chamath Palihapitiya. The stock briefly traded above $50 in 2021 before declining below $2 by 2024.
QuantumScape, a solid-state battery company, reached a market cap above $40 billion shortly after its SPAC merger. It subsequently declined by more than 90%.
Not every SPAC deal failed. DraftKings, which went public through a SPAC in 2020, has been a relative success. But the aggregate data is damning: most SPAC investors who held through the business combination lost money.
Why SPACs Underperformed
Several structural factors explain the poor aggregate outcomes:
Dilution. The sponsor's 20% promote, combined with warrants and other costs, means that SPAC shareholders effectively pay a 20% to 30% premium over the underlying value of the target company. Before the merged company can generate returns for public shareholders, it must first overcome this dilution drag.
Academic research by Michael Klausner and Michael Ohlrogge quantified this: the median SPAC delivered only $6.67 in value per $10 invested by the time of the merger, after accounting for dilution from the promote, warrants, and redemptions.
Adverse selection. The best private companies, those with strong fundamentals, established revenue, and clear paths to profitability, can go public through traditional IPOs with top-tier investment bank underwriting. They do not need SPACs. The companies that chose SPACs were disproportionately pre-revenue, speculative, or unable to withstand the due diligence of a traditional IPO process.
Forward projections. SPACs allowed target companies to present forward-looking financial projections in their investor materials, something prohibited in traditional IPO prospectuses. These projections were frequently aggressive. Many companies projected billions in revenue five years out despite having little or no current revenue. When reality fell short of projections, stock prices collapsed.
Sponsor incentive misalignment. Sponsors had every incentive to close deals at the highest possible valuation (which determined their promote's value) and minimal incentive to protect other shareholders' capital.
Regulatory Response
The SEC responded to the SPAC boom with increased scrutiny.
In 2022, the SEC proposed rules that would increase SPAC disclosure requirements, hold sponsors and target companies to the same liability standards as traditional IPOs, and require more transparent accounting for SPAC costs and dilution. Key provisions included treating SPAC projections the same as traditional IPO forecasts (removing the safe harbor for forward-looking statements) and requiring clearer disclosure of the sponsor promote's dilutive impact.
Final rules adopted in early 2024 imposed significant new requirements, including enhanced disclosure about compensation paid to sponsors, conflicts of interest, dilution analysis, and the requirement that financial projections be prepared with a reasonable basis. De-SPAC transactions were made subject to the same liability framework as traditional IPOs.
These regulatory changes, combined with poor performance and the end of the low-interest-rate environment, caused SPAC activity to collapse. In 2023 and 2024, SPAC IPOs dropped to a fraction of boom-era levels. Many SPACs that had raised capital could not find suitable targets and were forced to liquidate, returning capital to shareholders (a good outcome for those shareholders, but a failure for the SPAC model).
When SPACs Can Work
The SPAC structure is not inherently worthless. It has legitimate advantages in specific situations:
Companies in industries with long development timelines (space, biotech, nuclear energy) may benefit from the ability to present forward projections to investors, provided those projections are realistic and the company has genuine technology.
Companies seeking to go public in volatile markets, where the IPO window might close during the months-long traditional process, can lock in a deal with a SPAC at a negotiated valuation.
Companies led by management teams with strong existing relationships with SPAC sponsors may benefit from the advisory and board expertise that experienced sponsors bring.
But these advantages are overwhelmed by the structural problems when applied indiscriminately. The SPAC boom demonstrated that a vehicle designed for occasional use by sophisticated parties becomes destructive when industrialized. The promote structure, the adverse selection of targets, and the misalignment of sponsor incentives produced outcomes that were, in aggregate, poor for ordinary investors.
The data from 2020-2023 provides a clear answer to the question in the title. SPACs can work in narrow circumstances with experienced sponsors, realistic target companies, and reasonable valuations. As a mass-market alternative to traditional IPOs, they produced results that ranged from disappointing to catastrophic.
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