SPAC Stocks Explained: A Beginner’s Guide

Special Purpose Acquisition Companies (SPACs) became one of the most talked-about trends in modern finance during the past few years. From fintech startups to electric vehicle makers, many private companies chose this faster route to enter public markets. But despite the hype, many investors still don’t fully understand how SPAC stocks actually work.

This educational guide explains SPACs in simple terms, including their structure, benefits, risks, regulations, and how they compare with traditional IPOs.

What Is a SPAC Stock?

A SPAC (Special Purpose Acquisition Company) is a publicly traded company created solely to raise capital and later merge with or acquire a private company. Because SPACs go public without operations, products, or revenue, they are commonly called blank-check companies.

Investors buy shares based mainly on the experience and reputation of the SPAC sponsors who launch the company. Once a target company is identified and the merger is completed, the process, known as de-SPACing, turns the private company into a publicly traded business.

Although SPACs have existed for decades, they gained massive popularity between 2020 and 2021, when hundreds of SPAC listings raised hundreds of billions of dollars globally. This surge was fueled by low interest rates, high market liquidity, and strong retail investor participation.

How SPAC Stocks Work

A SPAC begins when experienced investors, venture capital firms, or private equity groups create a shell company and take it public through an IPO. Even though the company has no operations, investors can buy units that typically include shares and warrants. The funds raised are placed into a protected trust account and cannot be used until a merger or acquisition is completed.

After the IPO, the SPAC usually has between 18 and 24 months to find a private company to merge with. If no deal is completed within that timeframe, the SPAC must liquidate and return the funds to investors, usually with accrued interest.

When a target company is announced, shareholders vote on the proposed merger. Investors who do not support the deal can redeem their shares for their portion of the trust account. After the merger closes, the combined company trades publicly under a new ticker symbol.

Buying SPAC Stocks

SPAC shares trade on major stock exchanges just like regular stocks. Investors can buy them through brokerage accounts or trading platforms.

Some investors prefer diversified exposure via SPAC ETFs, such as:

• Defiance Next Gen SPAC Derived ETF (SPAK)
• Morgan Creek-Exos SPAC Originated ETF (SPXZ)
• SPAC and New Issue ETF (SPCX)
• The De-SPAC ETF (DSPC)

However, many SPAC ETFs are relatively new and may have higher expense ratios than traditional ETFs.

SPAC vs IPO: Key Differences

Both SPAC mergers and traditional IPOs help companies become publicly traded, but the process and risk profile differ significantly.

Initial Process

Traditional IPO

• Private company raises money directly from investors.
• Requires banks, roadshows, and extensive disclosures.
  

SPAC

• A shell company raises money first.
• Later merges with a private company to bring it public.

Costs

Traditional IPOs can be expensive. Investment banks often charge 3.5%–7% of IPO proceeds. 

SPAC deals typically reduce legal and consulting costs because funding is already raised.

Timeline

• SPAC merger: 3–6 months
• Traditional IPO: 12–18 months

This faster timeline is one reason many startups choose the SPAC route.

Due Diligence and Transparency

IPO companies face intense regulatory scrutiny before going public. SPAC mergers historically faced less strict reviews, although regulators are tightening rules.

Management Continuity

IPO investors know the company and leadership before investing. SPAC investors often invest before the target company is even known.

Advantages of SPAC Listings for Companies

For private companies, merging with a SPAC offers several potential benefits. The process can provide quicker access to public markets, greater certainty about valuation, and the ability to negotiate deal terms directly with sponsors rather than relying entirely on market demand.

SPAC deals can also allow companies to share forward-looking projections more openly during negotiations, something that is more restricted during traditional IPOs. This flexibility can be especially attractive for high-growth startups that have strong future potential but limited current revenue.

Famous Companies That Went Public via SPAC

Several well-known companies entered public markets through SPAC mergers, including DraftKings, Lucid Group, Virgin Galactic, WeWork, Opendoor, Nikola, Payoneer, and Dave. These high-profile deals helped drive the global popularity of SPACs and attracted widespread media attention.

What Happens After a SPAC Merger?

After a merger is announced, SPAC share prices often experience increased volatility as investors evaluate the target company. Once the merger closes, SPAC shares automatically convert into shares of the new public company.

Many investors continue trading the stock like any other publicly listed company, while others may choose to exercise warrants or sell their holdings. Lock-up periods typically prevent insiders from selling shares for six to twelve months after the merger, helping stabilize the stock price and reduce sudden selling pressure.

Why Many SPAC Stocks Decline Over Time

Despite their popularity, research suggests many SPAC stocks struggle after merging. One reason is that sponsors are rewarded primarily when a deal is completed, which may create pressure to finalize mergers even when they are not ideal.

In addition, shareholder value can be diluted by fees, warrants, and deal costs, meaning the combined company often receives less net cash than investors expect. Some SPAC deals have also involved companies with weaker-than-expected financial performance, reducing investor confidence.

As a result, regulators have increased oversight of SPAC transactions, requiring stronger disclosures and improved investor protections.

Should Investors Consider SPAC Stocks?

SPACs offer unique opportunities:

• Early access to emerging companies
• Faster path to public markets
• Ability to redeem shares if you dislike the merger

But they also carry risks:

• Unknown target company at purchase
• Potential dilution
• Historically weak long-term performance

Conclusion

SPACs transformed how companies go public by offering a faster and more flexible alternative to traditional IPOs. While they provide early access to emerging companies and innovative industries, they also introduce new risks that investors must understand.

Before investing in SPAC stocks, thorough research and careful analysis are essential. Like any investment, understanding the structure, incentives, and long-term outlook can help investors make smarter decisions and manage risk effectively.

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