What is a Special Purpose Acquisition Company?

The primary function of a Special Purpose Acquisition Company (SPAC) is to raise funds in a public market via an IPO and then use those funds to acquire a private company. After the acquisition or merger, often referred to as business combination, the combined company trades and operates like any other publicly-traded company. SPACs can be sponsored by private equity firms, individuals or a combination of individual and entity sponsors and usually bring together a seasoned management team that has expertise and experience within a particular industry or sector.

The SPAC IPO approach has experienced a sizable growth in popularity since 2019, especially with the COVID-19 pandemic driving market volatility and hindering many traditional IPO plans.

The Special Purpose Acquisition Company Process

The Special Purpose Acquisition Company IPO process is widely considered quicker and more straightforward than a traditional IPO process. Like in a traditional IPO, a SPAC files a Form S-1 with the Securities and Exchange Commission (SEC) in order to go public and begin trading on a securities exchange like NASDAQ or NYSE. However, because the SPAC is not an operating company its S-1 disclosure is not as lengthy and focuses primarily around the management team rather than existing business operations. The SEC review process typically takes around 40 days from start to finish, which is a much shorter review period than that of a traditional IPO.

During the initial phase, the sponsor solidifies the management team and outside independent directors. It hires bankers to underwrite the offering and lawyers and auditors to prepare the documentation and to file the S-1 registration statement with the SEC. Once the SPAC prices its IPO, all funds raised in the IPO are placed in a trust account. The SPAC typically has between 18 and 24 months to find a target company to acquire with the capital raised in the UPO. If this deadline is not met, the SPAC is liquidated, and the money is returned to investors. If a suitable target is identified, investors have the right to vote for or against the merger and a separate right to redeem their shares in the SPAC.

Many investors have now realized that SPACs offer a low risk investment for the individual investor, as their money is held in a trust and returned if the SPAC IPO fails to acquire a company or the investor opts to redeem their shares.

The acquired operating business is often seen as having a strong potential to grow once it becomes a publicly traded entity and gains the expertise of the SPAC’s management team. This, combined with the expedited IPO timeline, are key reasons why a growing number of private companies are now looking at SPACs as their potential exit options.

Insurance Needs For A Special Purpose Acquisition Company

Although the Special Purpose Acquisition Company IPO process differs somewhat from a traditional IPO, essential insurance needs still remain—specifically Directors and Officers (D&O) insurance at the IPO, business combination and beyond and M&A representations and warranties insurance (RWI) at the time of the business combination.

A SPAC is unable to attract knowledgeable, experienced independent directors to serve on its board unless it has sufficient D&O coverage in place at the time of the IPO. After the business combination, good D&O coverage for the combined, now publicly-trading operating company, is extremely important to protect the company’s balance sheet and its directors and officers.

RWI coverage should be considered an essential element of the SPAC acquisition process as SPACs increasingly compete with other SPACs and private equity firms for same private company targets. RWI allows the SPAC to make a more enticing offer backed by an RWI policy while minimizing escrow and indemnity for the target entity.

Post business combination, the new company must also be prepared for ongoing compliance with all necessary regulations, including a review and possible upgrade of its overall insurance coverage. This can involve property insurance, tax liability insurance, cyber liability insurance and other insurance areas, depending on the entity’s business.

Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a critical element of the SPAC M&A process.

For more on Special Purpose Acquisition Companies:

  • SPAC Finance: Read about SPAC Finance and how SPACs spurred a reopening of the capital markets during the pandemic.
  • SPAC Stocks: Learn about SPAC stocks and their possible advantages and disadvantages regarding investment.
  • SPAC IPOs vs. Traditional IPOs: Discover the key differences between traditional IPOs and SPAC IPOs.
  • SPAC Acquisition Process: Learn how the acquisition process works when a SPAC purchases a target company.