SPAC Explained: How Blank-Check Companies Work from Formation to Merger

The SEC’s final rules on SPACs, adopted in January 2024 and effective for transactions closing after July 2024, have fundamentally re-engineered the liability and safe harbor frameworks governing blank-check companies. Prior to this rulemaking, the combined market capitalisation of SPAC mergers in the US exceeded USD 80 billion in 2021 alone, according to SPAC Research data, but the subsequent collapse in deal volume—down to approximately USD 10 billion in 2023—reflected acute regulatory and investor skepticism. The 2024 reforms now treat SPAC merger targets as co-registrants for securities law purposes, extending Section 11 liability under the Securities Act of 1933 to forward-looking projections filed in proxy statements or registration statements. For Hong Kong-based issuers and cross-border sponsors evaluating a US listing via this route, the new regime imposes disclosure standards comparable to a traditional IPO but with a compressed timeline and a fully funded trust account. Understanding the mechanics from formation through de-SPAC is no longer optional; it is a prerequisite for any party structuring a US-listed vehicle under the current SEC oversight.

The SPAC Lifecycle: Formation, IPO, and Trust Mechanics

A SPAC is formed by a sponsor group—typically comprising private equity professionals, former investment bankers, or industry executives—who contribute nominal seed capital, often between USD 25,000 and USD 1,000,000, in exchange for founder shares. These founder shares, usually representing 20% of the post-IPO equity, are purchased at a fraction of the IPO price, creating a powerful economic incentive for the sponsor to consummate a business combination within the prescribed 18-to-24-month window. The sponsor’s equity is structured as Class B common stock, which converts into Class A common stock at the time of the de-SPAC transaction on a one-for-one basis, subject to anti-dilution adjustments tied to the redemption level of public shareholders.

The SPAC then conducts an initial public offering of units, each comprising one share of Class A common stock and a fraction of a warrant—typically one-half or one-third of a warrant. These units trade on the NYSE or NASDAQ under a single ticker until 52 days post-IPO, after which the components separate and trade independently. The IPO price for each unit has been standardised at USD 10.00 since the modern SPAC era began in the early 2010s, a convention that persists despite the 2024 regulatory changes. The gross proceeds from the IPO, minus underwriting discounts and offering expenses, are deposited into a trust account, which is held by a qualified trustee (e.g., Wilmington Trust or BNY Mellon) and invested exclusively in U.S. government securities with a maturity of 185 days or less, or in money market funds meeting Rule 2a-7 under the Investment Company Act of 1940.

The Trust Account and Redemption Rights

The trust account is the central structural safeguard for public shareholders. Per the SEC’s 2024 final rules, the trust must hold at least 100% of the IPO proceeds until the earlier of the business combination or the SPAC’s liquidation. Any interest earned on the trust—historically yielding between 2% and 5% per annum depending on the interest rate environment—accrues to the benefit of public shareholders who do not redeem. Shareholders who vote against the proposed business combination, or who simply choose to redeem regardless of their vote, are entitled to receive their pro rata share of the trust, which is almost always approximately USD 10.00 per share plus accrued interest.

This redemption right is a critical risk factor for the sponsor and target company. In 2021, average SPAC redemption rates exceeded 60% across all completed mergers, per data from the SPAC Research database. A high redemption rate reduces the cash available to the combined company, potentially requiring the sponsor to backstop the trust with private investment in public equity (PIPE) financing. The 2024 rules did not alter redemption mechanics, but they did require enhanced disclosure of the sponsor’s plan to address potential redemption shortfalls, including any side agreements with anchor investors.

The De-SPAC Process: From Target Identification to Business Combination

Target Sourcing, LOI, and Definitive Agreement

The sponsor’s management team typically identifies a target company through proprietary sourcing, investment bank introductions, or auction processes. The target must be a private operating business—a SPAC cannot combine with another blank-check company or with a shell company, pursuant to NYSE and NASDAQ continued listing standards. Once a target is identified, the parties execute a non-binding letter of intent (LOI) or term sheet, which outlines the key economic terms: valuation, consideration structure (cash versus stock), earnout provisions, and the anticipated timeline.

The definitive business combination agreement is a complex, multi-jurisdictional document. For a Hong Kong-headquartered or China-based target, the agreement must address PRC regulatory approvals under the Cyberspace Administration of China (CAC) rules for overseas listings, which were clarified in the February 2023 filing requirements. The agreement also sets forth representations and warranties, closing conditions, and indemnification provisions. A typical de-SPAC transaction values the combined entity at an enterprise value between USD 500 million and USD 2 billion, though the market has seen both smaller and larger deals. The consideration to target shareholders is paid in a mix of cash from the trust and newly issued SPAC shares, with the sponsor’s founder shares converting at the merger.

Shareholder Vote, Proxy Statement, and SEC Review

The SPAC must convene a special meeting of its public shareholders to approve the business combination. The SEC’s 2024 rules now require that a registration statement on Form S-4 or F-4 be filed and declared effective before the shareholder vote, effectively merging the proxy statement and the registration statement into a single document. This document must include audited financial statements of the target for the most recent two fiscal years, pro forma financial information reflecting the combined entity, and detailed disclosure of the sponsor’s compensation and conflicts of interest.

The SEC review period for a de-SPAC transaction typically spans 90 to 150 days, during which the SEC staff may issue multiple comment letters. The 2024 rules explicitly extend Section 11 liability to projections included in the registration statement, meaning that any forward-looking revenue, EBITDA, or cash flow forecasts must be supported by a reasonable basis and disclosed with clear assumptions. This has materially increased legal and accounting costs for SPAC mergers. According to a 2024 study by the Harvard Law School Forum on Corporate Governance, the average legal and advisory fee for a de-SPAC transaction increased by 35% to approximately USD 15 million post-rule implementation.

PIPE Financing and Backstop Arrangements

To ensure the combined company has sufficient cash post-merger, sponsor groups often arrange a PIPE—a private placement of shares sold to accredited investors at the merger price, typically USD 10.00 per share. PIPE investors are usually hedge funds, family offices, or institutional asset managers who commit to purchase shares that are not redeemed by public shareholders. The PIPE is structured as a separate offering exempt from registration under Rule 506(b) or Rule 506(c) of Regulation D.

The sponsor may also enter into a backstop agreement with a third-party investor or a related party to purchase any remaining shares if redemptions exceed a certain threshold. The 2024 SEC rules require detailed disclosure of any backstop arrangements, including the identity of the backstop party, the fees paid, and any material terms. In practice, backstop fees range from 2% to 5% of the backstop amount, payable in cash or warrants. The presence of a credible backstop is a strong signal to the market that the sponsor is committed to closing the transaction.

Post-Merger Considerations: Listing, Lock-ups, and Ongoing Compliance

Combined Company Listing and Ticker Change

Upon shareholder approval and satisfaction of all closing conditions, the business combination closes, and the combined company’s shares begin trading on the NYSE or NASDAQ under a new ticker symbol. The SPAC’s warrants typically remain outstanding and trade under a separate ticker. The combined company must meet the applicable exchange’s continued listing standards, which include a minimum bid price of USD 1.00 per share, a minimum market value of publicly held shares (USD 15 million for NYSE, USD 5 million for NASDAQ), and compliance with corporate governance requirements such as independent board majority and audit committee composition.

For a Hong Kong-incorporated or Cayman Islands-incorporated target, the post-merger entity is usually a Cayman Islands exempted company that becomes the successor issuer. The company must file an annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the SEC. The first Form 10-K post-merger must include audited financial statements for the combined entity, which often requires significant work by the target’s finance team to reconcile PRC GAAP or HKFRS to U.S. GAAP.

Founder shares and sponsor warrants are subject to lock-up agreements that restrict their sale for a period following the merger. The standard lock-up period is 180 days, though some SPACs have adopted 12-month or even 18-month lock-ups for sponsor shares. PIPE investors may also be subject to a lock-up of 60 to 180 days, depending on the terms negotiated in the subscription agreement. The lock-up provisions are disclosed in the registration statement and are enforceable under the definitive agreement.

The SEC’s 2024 rules do not mandate a specific lock-up period, but they do require disclosure of any hedging or monetisation arrangements by the sponsor during the lock-up. The Hong Kong Securities and Futures Commission (SFC) has no direct jurisdiction over U.S. lock-ups, but Hong Kong-based sponsors should be aware that the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 571 of the Laws of Hong Kong) imposes general principles of honesty and fairness that may be relevant if the sponsor is also a licensed entity in Hong Kong.

Actionable Takeaways

Evaluate whether a SPAC merger or a traditional IPO better suits the target’s disclosure readiness, as the 2024 SEC rules now impose Section 11 liability on projections, making the de-SPAC process legally equivalent to a registered offering.
Secure a credible PIPE or backstop arrangement before announcing the transaction, as redemption rates remain structurally high—averaging 45-60% in 2024—and a cash shortfall can jeopardise the combined company’s balance sheet.
Engage PRC legal counsel early to address CAC filing requirements under the February 2023 regulations, as any delay in PRC regulatory approval can derail the merger timeline and trigger termination rights.
Structure the sponsor’s founder shares with a performance-based earnout tied to post-merger stock price thresholds, as this aligns incentives with public shareholders and reduces dilution risk.
Ensure the combined company’s finance team is prepared for U.S. GAAP reporting within 90 days of closing, as the first Form 10-K filing is a hard deadline with no extension available for first-time filers.