A special purpose acquisition company (SPAC) is a corporation formed by private individuals to facilitate investment through an initial public offering (IPO). The proceeds are used to buy one or more existing companies.
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When money is raised by an IPO for a SPAC, the funds are placed into a trust until the purchase is made or a predetermined period of time elapses. If the transaction and associated legal formalities are not completed by the deadline, the money is returned to the investors with allowances for bank and broker fees. By law, the SPAC management personnel are not allowed to collect salaries during this time.
In recent years, with increased regulation by the Securities and Exchange Commission (SEC) following high-profile abuse cases, SPACs have begun to proliferate in various industries. The SPAC approach sometimes makes it possible for companies to go public when they cannot afford to do so by traditional means. The SPAC alternative can also be attractive when credit is tight. Unique investment opportunities exist through SPACs with defined acquisition goals.