SPACs are companies without operating histories that are formed for the purpose of making acquisitions. The targets of the SPAC aren’t disclosed until the acquisition is announced. SPACs generally have 18 to 24 months to make an acquisition, which must be approved by 70% of the shareholders. SPACs are sold as units consisting of one share and one warrant. The SPAC structure requires the company to put approximately 90% of the proceeds raised into a trust, which is refunded to shareholders if an acquisition is not completed within the allotted time frame or if shareholders fail to approve the acquisition. Because SPACs lack any operations, the most important criteria in evaluating them is the reputation of the management team. Thus far, hedge funds have been the primary buyers of SPACs.

In our prior update, we were more optimistic that incentives were aligning for SPAC management teams, underwriters and capital-starved companies to tap into a $10 billion pool of unused IPO proceeds. With alternative funding avenues closed, it was plausible that SPACs could negotiate attractive deal terms to offset sponsors’ dilutive stake and lure fundamental investors into the space. However, in the midst of a deepening global credit crisis, the SPAC's limited shelf life could prove to be its greatest obstacle. [more]