The term SPACA SPAC is a publicly traded company that doesn’t have any business operations. It is set up to raise capital to acquire or merge with a private company and take it public. A SPAC’s shares often sell for $10 or less during their IPO and come with warrants attached to them. (Special Purpose Acquisition Company) is popping up more and more often in the media. Do you know what a SPAC is?

A SPAC is basically a publicly traded company that doesn’t have any business operations. It is set up to raise capital to acquire or merge with a private company and take it public

How does it work?

Generally speaking, a SPAC is formed by a group of founding shareholders, possibly with a solid reputation and extensive experience in a particular sector. When it’s created, a SPAC does not disclose the name of the company it plans to acquire with the raised capital because it hasn’t signed any agreements with a company at that point. Even the founding shareholders may not know the target company’s name at the start of the process. A SPAC may, however, disclose the geographic region or commercial sector involved.

At least 90% of the funds raised by a SPAC are set aside in liquid or low-risk securities until a private company can be secured. The acquisition must take place within a defined time frame, typically a maximum of three years. If the acquisition isn’t completed within that time, at least 90% of the funds that are raised and any returns they may have generated are redistributed to the investors.

In Canada, if a SPAC wants to be listed on the Toronto Stock Exchange, it needs to raise a minimum of $30 million for no less than $2 per shareA share, also referred to as stock, is an equity security that entitles you to an ownership interest in a company.
The company can distribute a portion of its earnings to shareholders by paying them a dividend.
The shares of companies listed on an exchange are bought and sold at the exchange.
When a company ceases to operate, the proceeds from the sale of its assets are used to pay its debts and taxes, and the rest of the money is distributed to shareholders.

A SPAC’s shares often sell for $10 or less during their IPO and come with warrantsA subscription warrant is a contract that gives the holder the right to purchase a bond, shares or another security at a certain price, within a specified period. Subscription warrants are generally offered to investors when they acquire another security (such as bonds or preferred shares). attached to them. The warrants give the holder the right, but not the obligation, to purchase additional securities of the company at a pre-set price within a specified time frame. For example, a

warrant may give you the right to acquire, during a certain length of time after the acquisition, shares at $9.75 (strike price), regardless of their stock market value.

The value of the SPAC’s shares may increase before the acquisition of the target company, particularly if there are favourable rumours about it. After the SPAC announces what company it wants to acquire, the investors will be asked to vote to approve or not approve the transaction

Why are investors interested in SPACs?

Investors in SPACs are hoping that the value of the SPAC’s shares will go up, particularly if it is able to secure the target company. If the SPAC does acquire the target company, they will be able to either sell their shares or, if they think their value will increase in the future, keep them.

The investors can use their warrants to purchase additional shares if the strike price is lower than the share’s market value. They can also sell their warrants on the stock market before they expire and keep their shares.

Risks associated with SPACs

A SPAC’s share price may fluctuate, which means an investor may end up paying more than the issue price. If the acquisition isn’t completed on time and the SPAC is wound up, the funds will be redistributed based on the amounts raised and the number of shares outstanding. Investors who bought shares at a higher price than the initial price may receive less than the amount they invested.

Investing in a SPAC can be risky because the investors don’t know which company the SPAC is planning to secure. SPACs tend to acquire emerging companies, which can represent a higher risk than well-established companies. Even if the acquisition is completed, there is no guarantee the shares will increase in value.


If you want to invest in a SPAC, make sure you choose one that operates in a sector you’re familiar with (if the SPAC provides that information). You’ll then be better able to assess the qualities of the SPAC’s founding shareholders and future outlook for the sector.


End of the insight