The sponsor has two years to acquire a yet-to-be-identified company. Until a business combination is completed, the money raised from investors is held in a trust account.
SPAC shares trade on an exchange while the sponsor searches for a company to take public, and it’s not uncommon for SPACs to trade sharply higher as investors react to rumors about merger candidates.
If an acquisition target isn’t found in the allotted time, the SPAC will liquidate. IPO investors will get back their initial investment, and buyers in the secondary market can redeem their shares at the initial offer price, typically $10 a share, dubbed the pro rata share.
Once a target company is announced, you must decide whether to stay invested in the new, post-merger company, which will trade with its own symbol, or redeem your shares at the pro rata price. You can get burned if you jump into a SPAC at or near a top.
How have SPACs performed? SPAC fever cooled in February, as they sold off with tech stocks and other speculative issues.
Regulatory scrutiny hurt, too. The Securities and Exchange Commission recently warned SPACs about issuing misleading sales projections and noted that SPAC sponsors may pursue deals that aren’t in the best interests of investors.
Overall, post-merger performance hasn’t been great.
