SPACs Are Back, What You Need to Know

Special purpose acquisition companies (better known as SPACs) appear to be making a comeback. SPAC offerings for 2025 have already nearly surpassed last year’s totals, with additional transactions in the pipeline.

SPACs last experienced a boom between 2020–2021, with approximately 600 U.S. companies raising a record $163 billion in 2021. Notable companies that went public through SPACs at that time include electric-truck maker Nikola Corp. and online sports-betting company DraftKings Inc. After reaching record heights, the SPAC market cooled considerably in 2022, as global stocks plunged and interest rates climbed.

The SPAC boom also caught the attention of the Securities and Exchange Commission (SEC), which launched enforcement actions alleging conflicts of interest, misleading celebrity endorsements, overhyped projections, and other misconduct. In 2024, the agency adopted new rules that enhance investor protection, establish new disclosure requirements for SPACs, and align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those of traditional IPOs. 

Understanding How SPAC Transactions Work

The sole purpose of a SPAC is to raise capital, usually through an initial public offering (IPO), and use those funds to acquire or merge with an existing private company. SPACs thereby allow the targeted company to go public without the expense of carrying out its own IPO. 

Unlike a traditional company, a SPAC is essentially a blank-check company or a shell company. It has no underlying operations. In addition, its business plan rarely extends beyond a search for a yet-to-be-named target. Accordingly, the prospectus to prospective investors focuses almost exclusively on the experience of the founders and/or management team of the SPAC. It may also identify the business, specific industry, or geographic area that the SPAC plans to target.

The sponsors of the SPAC supply the initial capital to form the SPAC. As the Security and Exchange Commission explains, a SPAC IPO is often structured to offer investors a unit of securities consisting of shares of common stock and warrants.  A warrant is a contract that gives the holder the right to purchase from the company a certain number of additional shares of common stock in the future at a certain price.

Once the IPO closes, the management team has a specified period of time (typically two years) to complete a merger or acquisition, often referred to as a “de-SPAC transaction.” While a portion of the funds is set aside to pay fees and expenses associated with the search for a target entity, the majority of the funds raised through the SPAC’s IPO are placed into a trust. The funds are held until the SPAC identifies and closes on a merger or acquisition target. Additionally, the SPAC must use at least 80 percent of its net assets for any such transaction.

Once the SPAC presents a potential target, generally referred to as an “initial business combination opportunity,” the SPAC’s shareholders have the opportunity to redeem their shares and, in many cases, vote on the initial business combination transaction. SPAC shareholders can elect to remain a shareholder of the combined company or redeem and receive back their funds held in the trust account. If the SPAC fails to reach a deal with a target company prior to the deadline expiration, the IPO revenues are returned to investors in pro rata shares.

Current Rise in SPAC Transactions

SPAC transactions are experiencing a resurgence in 2025. Ongoing stock market volatility and tariff uncertainty have caused some companies to reconsider their IPO plans. At the same time, companies are hopeful that the Trump Administration’s SEC will be much more friendly to SPACs.

So far, there have been 58 filings for SPAC initial public offerings on U.S. exchanges in the first four months of 2025. According to Dealogic data, 25 of those have priced along with 14 that were filed prior to 2025, generating $7.71 billion in deal volume. That’s the most since 2022 and already significantly more than the $1.27 billion in SPAC IPO deal volume in 2024.

This time around, valuations are more conservative and deal sizes are smaller. There is also a greater emphasis on profitability vs. pure growth. These trends suggest that SPACs may once again be a credible and strategic option for raising capital.

Risks and Benefits of SPACs

Of course, before rushing to capitalize on the hot SPAC market, investors and startups alike must understand the risks and benefits of the unique investment vehicle. For investors, the primary risk is that SPAC managers are inexperienced or otherwise incompetent and/or will fail to acquire a private company. However, because all investor funds are held in escrow and must be returned in the event there is no acquisition, there is significant downside protection.

The upsides for investors include the imposition of a deadline to consummate a transaction, as well as the ability to sell their shares on the secondary market while awaiting a merger or acquisition. Investors not only have a say in the final deal, but can also opt out and elect to receive reimbursement of their funds.

For target companies, there are also several benefits. In most cases, merging with a SPAC is quicker and less costly than conducting a traditional IPO because the SPAC has already done a lot of the leg work. As recent trends highlight, SPACs are often still active when the IPO market cools off. The target company can also often benefit from the use of SPAC securities as consideration for acquiring other companies or for attracting talented support personnel or an important company officer or director.  The acquired company can also benefit from the expertise of the SPACs’ experienced management and industry professionals.

Key Takeaway

As SPACs regain popularity, the legal landscape surrounding this investment vehicle will also continue to evolve. We are experienced counsel in SPAC offerings, and have given a number of lectures for attorneys on the operative details and developments in the SPAC “industry.”  We encourage businesses and investors to closely monitor legal developments and work closely with experienced counsel to determine how to best take advantage of potential opportunities and mitigate your risks. For guidance, we encourage you to contact a member of Scarinci Hollenbeck’s Corporate Transactions & Business Practice.