Can a SPAC Have a Target Before Its IPO?

SPAC (special purpose acquisition companies), which are also referred to as blank-check companies, have become popular over the last year but have been struggling to find merger targets. Can SPACs can have a target before their IPO?

SPACs have rivaled traditional IPOs, especially in the last year. According to SPACInsider, 2020 saw the most SPAC IPOs in ten years—248 altogether, raising $83.5 billion in total.

There's almost a full quarter remaining in 2021, and there have already been 456 SPAC IPOs this year. That's a little less than double the SPAC count of 2020. In total, SPAC IPOs have raised over $130 billion in 2021. However, the average SPAC IPO size in 2021 is $285.9 million, which is lower than 2020's average of $336.1 million.

While filing for an IPO, almost all the SPACs highlight the characteristics they're seeking in target companies. Usually, these features include the industry. For instance, a flurry of SPACs in 2020 targeted the green energy sector, and Bill Ackman–sponsored Pershing Square (PSTH) identified several traits it was looking for in a merger target.

The SEC states, “A SPAC may identify in its IPO prospectus a specific industry or business that it will target as it seeks to combine with an operating company, but it is not obligated to pursue a target in the identified industry.” Accordingly, several SPACs have deviated from their criteria if they find a compelling opportunity.

Occasionally, a SPAC sponsor may have a target in mind before the IPO and may launch a SPAC just to take that company public. That's not often the case, however, as suggested by the long list of SPACs hunting for targets.

The SPAC market has become crowded amid the flurry of new SPACs and rare high-quality merger targets. Companies looking to go public are now spoiled for choice. Apart from listing through a SPAC, they may also opt for a traditional IPO or a direct listing to go public, though direct listings aren't for everyone—under the current rules, companies going public through that route cannot raise cash.

In contrast, through a SPAC merger, there's cash ready in a trust account and a promise to pool in more funds through PIPE (private investment in public equity). This arrangement is most appealing to growth companies that are burning cash but need money to list and want to invest in growth.

Not all SPAC mergers are being approved now, though. Even if a sponsor has a target in mind, the merger still has to be approved by stockholders. More recently, investors have become wary of SPACs and their merger targets, as evidenced by the huge waves of redemptions in SPAC mergers.