Are SPACs Dead? Examining the Current Market

Special purpose acquisition companies, or SPACs, have generated discussion regarding their role in capital markets. These entities offer a distinct pathway for private companies to become publicly traded without a traditional initial public offering. The market has observed significant shifts in SPAC activity, leading many to question their ongoing relevance and viability. Understanding the mechanics and trajectory of these vehicles is important for grasping their place in contemporary finance.

Understanding a SPAC

A Special Purpose Acquisition Company (SPAC) is a shell company formed to raise capital through an initial public offering (IPO) to acquire an existing private company. This structure allows the acquired private company to become publicly traded through the SPAC, bypassing the traditional IPO process. SPACs are often called “blank check companies” because they typically do not have a specific acquisition target identified at the time of their own IPO.

The process begins with experienced sponsors forming the SPAC and filing a registration statement with the U.S. Securities and Exchange Commission (SEC). After SEC approval, the SPAC conducts its IPO, selling units to public investors, usually at $10 per unit. Each unit commonly consists of one share of common stock and a fraction of a warrant, which provides the right to purchase additional shares at a specified price. The capital raised from the IPO is placed into an interest-bearing trust account, restricted for an acquisition or for returning funds to investors.

After the IPO, the SPAC typically has 18 to 24 months to identify and merge with a target company. This merger, known as a de-SPAC transaction, takes the private target company public. If a suitable acquisition target is not found within the specified period, the SPAC must liquidate, and the funds in the trust account are returned to public shareholders. This mechanism provides downside protection for investors, as their principal investment is held in trust.

The Evolution of SPAC Activity

SPAC activity has transformed significantly, moving from heightened interest to a more measured pace. SPAC IPOs represented a small percentage of U.S. IPOs in the early 2000s, but their proportion increased substantially from 2015 through mid-2025.

A notable surge in SPAC IPOs occurred in 2020 and 2021, with hundreds of SPACs raising billions of dollars. This period saw a significant increase in capital deployed through SPAC vehicles. The rapid expansion was partly driven by the perceived advantage of a potentially faster path to public markets for target companies compared to traditional IPOs.

Following the peak in 2021, the volume of new SPAC formations and completed de-SPAC transactions began to adjust. The number of SPAC IPOs has been lower since 2021, though 2025 is on pace to see an increase. This adjustment reflects a shift from the accelerated pace of preceding years, with both SPAC IPOs and initial business combinations occurring at lower rates. The market has since shown a trend toward stabilization, emphasizing the quality of deals rather than sheer volume.

Factors Shaping the SPAC Landscape

Several external and systemic elements have influenced changes in SPAC activity. Broader economic conditions, such as fluctuations in interest rates, have played a role. Rising interest rates can make speculative investments, including SPACs, less attractive as investors seek more predictable returns from other asset classes. Higher inflation concerns and tighter monetary policies have also contributed to a less accommodating market for SPACs, particularly impacting growth companies.

Increased regulatory scrutiny from authorities, particularly the SEC, has also reshaped the SPAC environment. The SEC has provided guidance regarding the accounting treatment of warrants issued by SPACs, influencing how these financial instruments are classified on balance sheets. This guidance often required reclassification of warrants from equity to liabilities, necessitating changes in financial reporting. The prospect of such increased regulatory oversight and compliance burdens has contributed to a decrease in new SPAC IPOs.

Shifts in investor appetite and preferences have further influenced the SPAC market. There has been a growing demand for greater transparency and more thorough due diligence regarding target companies. Investors have become more discerning, seeking clearer financial projections and a deeper understanding of the underlying businesses. The initial attractiveness of SPACs has been tempered by a heightened focus on the long-term performance and financial health of de-SPACed entities. This evolution in investor expectations has led to a more cautious approach within the market.

Outcomes for SPACs and Investors

The trajectory of a SPAC can conclude in several ways, each with distinct outcomes for the entity and its investors. If a SPAC fails to identify and complete a business combination within its stipulated timeframe, typically 18 to 24 months, it must liquidate. In such instances, the funds held in the trust account, along with any accrued interest, are returned to the public shareholders. This provides a safety net for investors, ensuring the return of their initial capital.

For SPACs that do complete a business combination, the post-merger performance of the newly public company can vary. Before a merger, SPAC shareholders typically have the right to redeem their shares for their pro rata portion of the trust account, usually around $10 per share plus interest, if they do not approve of the proposed transaction. This redemption option allows them to exit the investment if they perceive the proposed target or deal terms as unfavorable. However, high redemption rates significantly reduce the cash proceeds available to the combined company for its future operations, potentially impacting its financial viability. Average redemption rates for deals closed in 2022 exceeded 80%, with some instances reaching 95%.

Dilution is another significant factor impacting investors in de-SPACed companies. One source of dilution comes from the “sponsor promote,” where SPAC sponsors typically receive shares representing about 20% of the SPAC’s post-IPO equity. This allocates a portion of the combined company’s equity to sponsors, which can reduce the per-share value for other investors. Warrants, issued to IPO investors as part of the initial units, also contribute to dilution when exercised, as they increase the number of outstanding shares. The combined effect of redemptions and dilution can result in lower effective cash per share for the merged entity, influencing post-merger share price performance.