SPACs explained: What they are and how they work

Learn what special purpose acquisition companies (SPACs) are, how they work, and why some businesses use them instead of a traditional IPO

If you’ve been reading up on financial market strategies, you may have come across the term “special purpose acquisition company,” or SPAC. But what does it mean?

Put simply, a SPAC is a publicly traded company that doesn’t make or sell anything. Instead, it’s created to raise money from investors, which is then used to buy a private company. This process allows the private company to become publicly listed without going the traditional initial public offering (IPO) route. 

Because investors typically don’t know which private company will be purchased, SPACs are often called “blank check companies.” Essentially, investors put their trust (and money) behind the team running the SPAC, hoping for a smart acquisition down the line. 

For example, companies like Virgin Galactic and Burger King went public through SPAC mergers, showcasing how this route can fast-track a company’s entry into public markets. However, as with any investment, there are still risks involved, including uncertainty about the company’s future performance. 

Let’s take a closer look at what SPACs are, how they work, and the risks and benefits involved. 

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SPACs first emerged in the early 1990s as an alternative investment vehicle, offering a more flexible way to bring private companies public. They were designed to help smaller companies access public markets without the heavy costs and long timelines of a traditional IPO. 

For years, SPACs were considered riskier and less credible than traditional IPOs. As a result, they remained a niche tool used by speculative industries where traditional IPOs were challenging, such as oil and gas. Big-name investors and major companies generally weren’t interested in SPACs, and most people had never even heard of them. 

SPACs may have had a slow start, but they skyrocketed in popularity in 2020, when they raised a combined $83 billion. This number doubled to over $162 billion in 2021. So, what fueled this boom? There are a few factors that help explain it: 

• Faster route to public markets: For private companies, merging with a SPAC offered a quicker, more streamlined way to go public — skipping many of the delays and disclosures required in a traditional IPO. This path was taken by DraftKings, the sports betting platform, which went public via SPAC mergers in 2020.
• Investor enthusiasm: The pandemic era sent markets soaring amid ultra‑low interest rates and massive stimulus efforts. This led investors to pursue trending, speculative offerings such as Lucid Motors, the electric luxury car company, which went public via SPAC mergers in 2020.
• Favorable regulatory window: During this time, U.S. regulators took a relatively hands-off approach to SPACs. That looser oversight made it easier and faster to get deals done.
• Celebrity buzz: High-profile entrepreneurs, fund managers, and even celebrities jumped on the SPAC bandwagon, sparking both media attention and investor confidence. For example, billionaire Chamath Palihapitiya became known as the SPAC King because of his involvement in multiple high-profile deals.

Despite their surge in popularity, SPACs come with real risks and undergo growing scrutiny. Many companies that went public through SPAC mergers have struggled to meet expectations, and regulators have started tightening oversight. For anyone considering this route, it’s important to understand these potential downsides:

• Risk of underperformance: Although premerger hype can drive up share prices, SPAC-backed companies may lose value after the deal closes. For example, some fail to deliver on projected growth, leaving early investors disappointed and long-term holders at a loss.
• Dilution of shareholder value: SPAC deals often include complex financial structures, such as warrants and sponsor incentives, that can dilute the value of common shares. This means once the merger is complete, existing shareholders may own a smaller slice of the company than expected.
• Potential regulatory changes: When SPACs began attracting more attention, regulators proposed new rules to improve transparency and protect investors. These changes could add more compliance hurdles and reduce the speed and flexibility that made SPACs appealing in the first place.

SPACs have always followed the rhythm of the broader market. When investor confidence is high and capital is flowing, SPAC activity tends to surge — and when conditions tighten, SPACs often fade from view.

After peaking in 2021, the SPAC market cooled quickly. Post-merger, many companies underperformed, and investor enthusiasm waned. By 2022 and 2023, the pipeline had slowed significantly, and traditional IPOs began to regain popularity.

Even though IPOs are making a strong comeback, SPACs haven’t disappeared. They remain a tool in the financial playbook — especially for companies that don’t fit the mold of a typical IPO candidate. During the last boom, for example, SPACs were used to take space travel companies and other ambitious ventures public.

Looking ahead, SPACs are likely to evolve. Stricter regulations, improved transparency, and more cautious investors could reshape how they’re structured and when they’re used. But the core concept — a quicker, alternative route to public markets — is still attractive under the right conditions.