Idea in Brief

The Function

SPACs are publicly traded corporations formed with the sole purpose of effecting a merger with a privately held business to enable it to go public.

The Advantages

Compared with traditional IPOs, SPACs often offer targets higher valuations, less dilution, greater speed to capital, more certainty and transparency, lower fees, and fewer regulatory demands.

The Caveats

Not all SPACs will find high-performing targets, and some will fail. Many investors will lose money. As an investment option they have improved dramatically, especially over the past year, but the market remains volatile. More changes are sure to come, which means that sponsors, investors, and targets must keep informed and vigilant.

Special Purpose Acquisition Companies, or SPACs, are garnering a lot of attention lately in corporate boardrooms, on Wall Street, and in the media. And for good reason: Although SPACs, which offer an alternative to traditional IPOs, have been around in various forms for decades, during the past two years they’ve taken off in the United States. In 2019, 59 were created, with $13 billion invested; in 2020, 247 were created, with $80 billion invested; and in the first quarter alone of 2021, 295 were created, with $96 billion invested. Then there’s this remarkable fact: In 2020, SPACs accounted for more than 50% of new publicly listed U.S. companies.

A version of this article appeared in the July–August 2021 issue of Harvard Business Review.