How a SPAC works
A SPAC is a listed company formed for one purpose: to merge with a private business and take it public. Here is the mechanism, the road from letter of intent to closing, and the protections built into it.
Three terms
- SPAC
- The vehicle. A listed company with no operating business that raises cash in an IPO with the aim of completing a business combination with one or more operating businesses.
- De-SPAC
- The merger itself. When it closes, the private company becomes the listed company and trades under its own name.
- Trust account
- The IPO proceeds, typically held in a segregated trust account in cash or government securities until a combination closes or the money is returned. Each SPAC’s prospectus sets out the exact terms.
Rights or warrants
Most SPAC units pair a share with a warrant or a right. The choice affects the timing and form of dilution; total dilution depends on the whole transaction.
Warrants
- Usually exercisable for a whole share at a fixed price, often $11.50, for years after closing.
- Outstanding warrants can weigh on the share price and complicate the cap table.
- Depending on their terms, they may have to be accounted for as liabilities and remeasured each period.
Rights
- Convert automatically into a fixed fraction of a share at closing, with no exercise price.
- The conversion ratio is fixed and nothing remains outstanding after the merger. Total dilution still depends on redemptions, sponsor shares, financing and any earn-outs.
- No securities are left to exercise after closing, which usually keeps the accounting simpler than for warrants.
In our record: Oxus units carried one warrant each. TAVI units carried one right to 1/10 of a share and no warrants. See both volumes.
From letter of intent to closing
An illustration, not a forecast: about five months from letter of intent to closing if every stage runs to plan, drawn to scale in weeks. Many deals take longer; Oxus and Borealis Foods took almost a year from signing to closing.
- Diligence · 3–5 weeksLOI, then technical, legal and financial diligence, and an investor plan.
- Documentation · 3–5 weeksBusiness combination agreement, F-4/S-4 drafting, PIPE (private investment in public equity) preparation.
- Announcement · 2–3 weeksSign, announce, execute PIPE subscriptions.
- SEC review and marketing · 8–10 weeksFile, answer SEC comments, run the roadshow.
- Closing · 1–2 weeksShareholder vote, redemptions, close. The combined company begins trading.
SPAC or traditional IPO
A high-level comparison. Practice and regulation keep changing, so every company should take its own legal, tax and financial advice.
| Factor | SPAC combination | Traditional IPO |
|---|---|---|
| Speed to market | Measured from the letter of intent, our illustrative timeline runs about five months to closing. Many deals take longer, depending on SEC review, financing, redemptions and the shareholder vote. | Measured from kick-off, often 6–12 months or more to listing, depending on preparation and the market window. |
| Valuation | Negotiated directly between the company, the sponsor and key investors, subject to market feedback and governance approvals. | Set by bookbuilding and investor demand close to pricing. |
| Fees | Underwriting fees are often split between upfront and deferred parts. The overall cost depends on structure and terms. | Underwriting commissions are generally paid at closing, alongside roadshow and listing costs. |
| Flexibility | Earn-outs, seller roll-over, share classes and PIPE (private investment in public equity) or forward-purchase structures can be tailored to the company. | A more standardised primary or secondary offering, with less room to tailor consideration. |
| Timing | The company and sponsor agree when to sign and announce. Closing still depends on SEC review, financing, the shareholder vote and the SPAC’s deadline. | More dependent on market conditions and on when the IPO window is open for the sector. |
Protections built in
SPACs carry safeguards for public shareholders, and they shape how a deal has to be built. Each SPAC’s prospectus and governing documents set out its exact terms.
Segregated trust
IPO proceeds are typically held in trust in cash or government securities, separate from the money that pays the SPAC’s operating costs.
Redemption rights
Public shareholders can typically redeem their shares for a pro rata share of the trust in connection with the combination, if they prefer not to stay in.
Sponsor capital at risk
The sponsor’s founder shares typically lose their value if no combination completes. That puts sponsor capital at risk, and it also gives the sponsor a reason to complete a deal that public shareholders may judge differently, which is why sponsor terms are disclosed.
Shareholder approval
Most combinations are put to a shareholder vote, with redemption offered alongside it. Whether a vote is required, and how redemption works, depends on the deal’s structure, the SPAC’s governing documents and exchange rules.
Why financing decides the close
Because shareholders can redeem at the vote, the cash left in trust at closing is uncertain. A sponsor’s ability to raise financing alongside the deal is often what gets a combination over the line.
For the Oxus and Borealis Foods combination, about $50 million of convertible notes was raised for Borealis before closing, $20 million of it from the Oxus sponsor, and converted into equity at closing. Sources:13D,closing 8-K,10-K.
View the Oxus financing