Frequently Asked Questions about SPACs

An article we liked from Thought Leader Mohammed Elayan of OCSC GOLD Sponsor Rutan & Tucker:

SPAC FAQs - What is a SPAC?

A special purpose acquisition company (or blank check company), which is formed for the purpose of acquiring or merging with an operating business by a specific date, typically 24 to 30 months after the SPAC’s IPO.

SPACs have been in the news lately. From the beginning of 2020 to July 22, 2020, there have been 48 SPAC IPOs, raising almost $18 billion. By contrast, in 2016, less than $3 billion in total SPAC IPO proceeds were raised. Notable companies that have merged with or been acquired by SPACs (and hence are now publicly traded) include DraftKings and Virgin Galactic, to name a few.

How are SPACs structured?

A SPAC will raise money in the public markets via an IPO from institutional and retail investors. Typically, all of the cash raised in the IPO will be placed in a trust account. This cash will be released only upon a closing of the business combination or if no business combination is consummated by a specified date.

As an incentive to investors, SPACs typically offer units in their IPO, with each unit comprising one share of common stock and one warrant to purchase a share of common stock (though sometimes the warrants are exercisable for only one-half of a share or less). Some SPACs do not even offer warrants. Units are typically priced at $10.00 per unit and the warrant is usually priced “out of the money” with an exercise price greater than the per unit price offered in the IPO.

Some SPACs include a “crescent term” which is an antidilution adjustment to the warrant exercise price. This adjusts the warrant strike price if additional securities are issued below a certain threshold. The strike price is typically adjusted to...