Special Purpose Acquisition Company (SPAC)

A SPAC (or “blank-check company”) is formed by a sponsor and lists on an exchange, typically selling units made up of one share plus a fraction of a warrant. IPO proceeds are placed in a trust account invested in short-term government securities. The SPAC then has a limited period, set in its charter and exchange rules and often extendable by shareholder vote, to agree a business combination (the de-SPAC). Public shareholders can redeem their shares for a pro rata portion of the trust at the time of the vote or an extension, whether or not they vote in favor. If no deal closes by the deadline, the trust is returned to shareholders. Deals are often supplemented by a PIPE investment.

Hedge funds invest in SPACs as a relatively low-risk yield strategy (holding shares with a trust-value floor and keeping warrants as optionality), as arbitrage, or as PIPE investors in the combination. Sponsors receive founder shares, which carry separate accounting and tax issues.

How funds account for SPAC positions. Units split into shares and warrants after a set period and must be separated in the security master with a cost allocation. Shares and listed warrants are valued at market prices; unlisted or thinly traded warrants use option models. Redemptions are recorded as a sale at the trust value per share, and the de-SPAC is processed as a corporate action converting SPAC shares into shares of the combined company.

Pitfalls. Common issues include missing redemption election deadlines, failing to split units correctly, not tracking warrants after the combination (when terms and tickers change), and mis-accounting for trust income. Rules on SPAC disclosures have tightened in recent years, so current requirements should be checked with counsel.