Raising Capital: The SPAC IPO

Introduction

This is the third in a series of Cohen & Gresser advisories on capital markets. In this advisory, we describe the path of a typical special purpose acquisition company (“SPAC”) through its initial public offering (“IPO”). SPACs are “blank check” companies—shell companies without an operating business—formed for the sole purpose of merging with or acquiring an operating business target, usually a private company, in a transaction often referred to as a “de-SPAC transaction.” A subsequent advisory will cover the de-SPAC transaction.

Capital markets are evolving rapidly. The current wisdom is that the microcap and SPAC IPO markets are getting tighter, with a focus on larger and higher quality offerings, while changes in the Nasdaq listing process, discussed below, are reinforcing this market trend. This may have an impact on both SPAC IPOs and de-SPAC transactions, but it may also make deSPAC transactions more attractive to operating companies that want to access public markets but aren’t ready for a traditional IPO. The Securities and Exchange Commission (the “SEC”) is trying to make public markets more attractive for smaller companies but has not yet taken any significant action specifically directed at the SPAC market.

SPACs, de-SPACs, and Traditional IPOs

SPACs have become an increasingly important part of the IPO market. For example, according to statistics released by the SEC, in 2025, there were 144 SPAC IPOs, raising an aggregate of $26.9 billion in proceeds, as compared to 228 traditional corporate IPOs, raising $43.3 billion in proceeds. Except in a few industry sectors (like life sciences), most traditional IPOs involve companies that emerge from their IPOs with multi-billion-dollar capitalizations. SPACs, by contrast, provide a vehicle for smaller companies to go public.

The SPAC IPO is only the initial phase of a longer journey, culminating in a de-SPAC business combination between the SPAC and a privately owned operating company. The de-SPAC transaction is the functional equivalent of an IPO of the operating company target. The SPAC and de-SPAC transactions, taken together, are more complex than a traditional IPO and are subject to additional requirements imposed by the SEC and Nasdaq or the NYSE.

SPAC IPOs

The SPAC is typically formed as a Cayman Islands company owned by a sponsor, which is often a Delaware limited liability company or LLC. In the SPAC IPO, the Cayman company may offer a unit consisting of a share of common stock and some portion of a warrant or right to purchase an additional share of stock following the consummation of the de-SPAC transaction, at a price per share slightly above the price at which the units are sold in the IPO. Prior to the IPO, the sponsor purchases, for a nominal price, a special class of stock that will convert into 20% or 25% of the shares of the combined company following the de-SPAC transaction, providing the sponsor with a “promote” to compensate it for undertaking the transaction. The sponsor may also raise so-called “risk capital” from members of the original sponsor group or key institutional investors in the IPO. The sponsor will use this risk capital to purchase units or other securities of the SPAC in a private offering that takes place simultaneously with the IPO. These privately placed units are “restricted securities” under Rule 144 under the Securities Act of 1933 (the “Securities Act”) and are structured so as not to have value unless a de-SPAC transaction occurs. The risk capital investors often receive a share of the promote. The sponsor, the risk capital investors and all holders of warrants receive registration rights exercisable after the de-SPAC transaction.

The proceeds from the public sale of units are placed in an escrow from which the SPAC generally cannot withdraw funds, except to pay taxes on interest income. Funds received from the parallel private offering, by contrast, are available to defray offering expenses and costs incurred in seeking a target for the de-SPAC business combination. The SPAC may also borrow to pay expenses after the offering, using convertible debt. When an acquisition target is located, the public investors may elect to redeem their shares from the escrow fund or remain as shareholders of the combined company. Their right to redeem creates financial uncertainty for the SPAC and, partly as a result, the SPAC typically arranges for additional deal financing in the form of a “PIPE,” or privately placed equity investment in the combined public company, again with registration rights covering the secondary sale of the equity following the de-SPAC transaction. The availability of PIPE financing also means that, with the right economics and investor appeal, a tiny SPAC can acquire a much larger target. If, by contrast, a deal is not accomplished in the time period specified in the SPAC IPO registration statement (usually 18 to 24 months, subject to possible extensions with shareholder approval), the escrowed proceeds from the IPO are returned to the public shareholders of the SPAC, while the privately placed debt and equity of the SPAC become essentially worthless when the SPAC is dissolved.

The proceeds from the public sale of units are placed in an escrow from which the SPAC generally cannot withdraw funds, except to pay taxes on interest income. Funds received from the parallel private offering, by contrast, are available to defray offering expenses and costs incurred in seeking a target for the de-SPAC business combination. The SPAC may also borrow to pay expenses after the offering, using convertible debt. When an acquisition target is located, the public investors may elect to redeem their shares from the escrow fund or remain as shareholders of the combined company. Their right to redeem creates financial uncertainty for the SPAC and, partly as a result, the SPAC typically arranges for additional deal financing in the form of a “PIPE,” or privately placed equity investment in the combined public company, again with registration rights covering the secondary sale of the equity following the de-SPAC transaction. The availability of PIPE financing also means that, with the right economics and investor appeal, a tiny SPAC can acquire a much larger target. If, by contrast, a deal is not accomplished in the time period specified in the SPAC IPO registration statement (usually 18 to 24 months, subject to possible extensions with shareholder approval), the escrowed proceeds from the IPO are returned to the public shareholders of the SPAC, while the privately placed debt and equity of the SPAC become essentially worthless when the SPAC is dissolved.

The initial SPAC IPO is, by far, the easiest part of the transaction. Although there are various deal points that will make the transaction either more or less favorable to investors, the underwriters or the sponsor, the overall documentation from one deal resembles the next. Many disclosures are mandated by Subpart 1600 of Regulation S-K, adopted in June 2024 as part of the SEC’s efforts to establish a comprehensive set of regulations governing SPACs and de-SPAC transactions. Items 1602 and 1603 of these regulations are designed to highlight the conflicts of interest faced by the sponsor management team and the potential dilution to investors as a result of the sponsor’s promote. Because of the similarity in the deal terms, however, investors often make decisions based on their faith in the sponsor team’s ability to complete a de-SPAC transaction, as well as their interest in the sector (if any) in which the SPAC intends to focus.

SPAC sponsors must pay attention to special stock exchange rules for SPACs, as well as other stock exchange developments affecting microcap stocks. In December 2025, Nasdaq adopted rules that will allow it to consider qualitative factors in determining whether to list a company that met qualitative listing criteria, whether for an operating company or a SPAC. Effective as of May 2026, Nasdaq raised certain of the quantitative requirements for SPACs applying to list on the Nasdaq Global Market.

The purchase of a SPAC unit is not in itself a particularly risky investment, because of the immediate placement of the IPO proceeds into escrow and the public investors’ right to redemption at the time of a proposed de-SPAC transaction, two features of SPAC transactions that have fueled their popularity. Until the de-SPAC transaction, the SPAC units typically trade at around the IPO price (generally $10.00 per unit). At the time of the de-SPAC transaction, the public investors may choose either to redeem their shares or become a shareholder of the combined company. Even if they redeem their shares or vote against the de-SPAC transaction, however, they may retain the warrant, allowing them to participate in any upside following the de SPAC transaction.

We will cover de-SPACs in our next capital markets advisory.

Originally published July 16, 2026

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