By Quantinvestor in SPAC — 16 Jul 2025

What Is a SPAC and Why Did They Boom?

Introduction

You could hardly open a financial news site in 2020 without seeing the word “SPAC.” Special Purpose Acquisition Companies, once an obscure corner of Wall Street, suddenly became the vehicle of choice for taking high-growth companies public. At their peak, SPACs raised more money in a single quarter than traditional IPOs. What exactly is a SPAC, and why did this alternative go-public route experience such a dramatic surge? This article unpacks the structure, advantages, risks, and the economic backdrop that fueled the boom.

What Is a SPAC?

A SPAC is a shell company that has no operations, products, or revenue. Its sole purpose is to raise capital through an initial public offering (IPO) and later merge with or acquire a private company. Because the shell already trades on a stock exchange, the private firm can bypass the lengthy traditional IPO process and become public through a merger, a step often called the “De-SPAC” transaction.

How a SPAC Works

Formation and IPO

A sponsor—usually a well-known private-equity executive, hedge-fund manager, or industry veteran—forms the SPAC and invests a nominal amount known as “risk capital.” The SPAC then sells units to the public, typically priced at $10 each, composed of one common share and a fraction of a warrant. The cash raised is placed in a trust account invested in low-risk Treasury bills until a target is found.

Target Search

The sponsor generally has 18 to 24 months to identify a suitable private company. During this window, the sponsor conducts due diligence and negotiates deal terms. If no acquisition is completed within the deadline, the SPAC is liquidated and investors receive their money back with interest.

De-SPAC Merger

Once a target is announced, shareholders vote on the merger. They can choose to keep their shares in the new combined entity or redeem them for their pro-rata share of the trust. After approval, the private company “inherits” the SPAC’s stock listing, effectively becoming public without a traditional roadshow or pricing day drama.

Reasons Behind the SPAC Boom

Low Interest Rates and Abundant Capital

The COVID-era monetary environment featured near-zero interest rates and unprecedented stimulus. Institutional and retail investors were hungry for yield and growth opportunities. SPACs offered both: downside protection through the trust account and upside potential if a blockbuster target was found.

Regulatory Arbitrage and Speed

SPACs allowed companies to provide forward-looking projections in investor presentations, something heavily restricted in a conventional IPO. This ability to “sell the future” particularly appealed to early-stage tech, electric-vehicle, and space-exploration firms whose current revenues were minimal. Additionally, the De-SPAC route often closed in a matter of months versus the year-long IPO slog, a critical advantage during volatile markets.

High-profile financiers like Bill Ackman, Chamath Palihapitiya, and even retired athletes and Hollywood figures launched SPACs. Their name recognition functioned as a marketing engine, attracting retail investors who might otherwise ignore small-cap offerings. Sponsors were compensated with “promote” shares—often 20 % of post-IPO equity—creating a lucrative incentive to get deals done.

Investor FOMO

Early SPAC successes such as DraftKings and Virgin Galactic delivered eye-catching returns, fostering a fear of missing out (FOMO). Social-media platforms and zero-commission trading apps amplified buzz, turning SPAC hunting into a retail pastime. The number of new SPAC listings exploded from 59 in 2019 to 248 in 2020, then to a record 613 in 2021.

Benefits of SPACs

For private companies, SPACs offered faster access to public capital, negotiated valuations, and the ability to pair up with seasoned sponsors who could add strategic value. For investors, SPAC units provided built-in downside protection—redeemable cash in trust—plus freely detachable warrants for extra upside. The structure seemed to deliver a rare win-win.

Risks and Criticisms

The boom also revealed pitfalls. Sponsor promotes diluted post-merger shareholders, often leaving them with smaller stakes in underperforming companies. Some sponsors rushed deals to beat the deadline, resulting in acquisitions of shaky businesses. Academic studies showed that the median SPAC traded below its $10 issue price within a year after merger, highlighting poor long-term returns. Regulators warned about overly optimistic projections and potential conflicts of interest.

The Boom Peaks and Pullback

By mid-2021, cracks began to form. The Securities and Exchange Commission (SEC) issued new guidance on SPAC accounting, forcing many to restate earnings. Rising Treasury yields made the safe returns on trust accounts less attractive. Meanwhile, crowded competition led to target scarcity, inflating valuations. Redemption rates spiked, leaving less cash for mergers. As overall equity markets cooled in 2022, SPAC issuance fell by more than 80 % from its peak.

Future Outlook

SPACs are unlikely to disappear; they remain a legitimate path to going public, especially for niche sectors or companies with complex stories. However, the froth is gone. Investors now demand experienced sponsors, clearer incentives, and targets with real revenues. Regulatory scrutiny is set to tighten disclosures and align sponsor compensation with post-merger performance. In short, the market is maturing from a speculative frenzy into a more disciplined alternative to the IPO.

Key Takeaways

• A SPAC is a cash-only shell that raises funds in an IPO and later merges with a private firm.
• The boom was fueled by low rates, faster timelines, celebrity sponsors, and investor FOMO.
• Benefits include speed, flexible valuations, and downside protection, but dilution and poor target quality pose risks.
• Regulatory changes, higher rates, and dismal post-merger returns cooled the market in 2022.
• The future of SPACs will be quieter, but higher-quality deals are likely as the structure evolves.

Conclusion

The SPAC phenomenon of 2020–2021 was a textbook case of financial innovation meeting an extraordinary macro environment. While the frenzy has subsided, understanding SPAC mechanics and incentives remains crucial for investors and entrepreneurs alike. Whether regarded as a bubble or a useful bridge to the public markets, SPACs have secured a permanent chapter in the history of modern finance.