A SPAC was a company with no business. It listed on the stock market, raised money, and promised to spend it buying a private company it had not found yet. For a few months in 2020 and 2021 it was one of the busiest ways onto the stock market. Here is how the shells worked, using what regulators and researchers wrote down, and what happened to the people who held them after the deal.
A blank check at $10
In the SEC's description, a SPAC is "a blank check company with no operations". It typically sells its shares at $10 a unit, and the money sits in a trust or escrow account while the shell looks for a private company to merge with. It typically has two years to find one, sometimes three. If it finds nothing, the shareholders get their share of the trust back [1].
The people who set the shell up, the sponsors, buy in on "more favorable terms" than the public [1]. The usual deal, called the promote, gave them about 20% of the shares after the listing [2].
The floor
Before the merger, a holder could hand the share back for their part of the trust, about $10. "Regardless of their vote, modern SPAC shareholders have the right to redeem their shares," as a 2022 law essay put it, which "makes the investment effectively riskless" [2]. The price had a floor under it.
The floor lasted until the deal closed. At that point, in the SEC's words, the SPAC "changes from essentially a trust or escrow account into an operating company" [1]. Whoever still held the share then held the new company, at whatever the market thought it was worth.
Plenty of holders saw that coming. For shells that merged between early 2019 and mid-2020, the median redemption rate, the share of public stock handed back for cash, was 73% [2].
The rumour trades the shell
A shell with a floor under it could still run a long way above $10 on talk alone. In early 2021 one shell was rumoured for months to be merging with an electric-car maker that had not yet shipped a car. Traders bid it up to as much as $60 a share [5].
When the deal was finally announced, the outside investors putting in fresh money were paying $15 a share. The shell's stock was down 32% the next morning [5]. Buying the rumour had worked. The announcement was the moment to have sold.
Where the $10 went
The share was sold at $10, but less than $10 of cash stood behind it by the time of the merger. The sponsors' promote, the warrants handed out with the units, the fees and the shares cashed out in redemptions all came out of the shares that stayed. A study of shells that merged between January 2019 and June 2020 put the median net cash per share at $5.70 [3].
Who did well: sponsors, with an average return of 549% on 2019–20 deals, and the outside investors who came in at the merger, with an average of +72% [2]. Who did not: of the 345 SPACs that had completed a merger since 2018, only 18% were trading above their offer price on 4 April 2022, and their average return was −32.8% [2].
The crest and the turn
613 SPACs listed in 2021, a count one industry tracker called "a high water mark not likely to be seen again" [8]. Famous names lent themselves to enough shells that on 10 March 2021 the SEC warned the public: "It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it" [4].
A month later the acting head of the SEC's corporate finance division called the boom "an unprecedented surge" and asked whether the merger should be treated as "the 'real IPO'", and whether its forecasts should get a legal shelter that a normal IPO's do not [6]. In January 2024 the SEC's final rules took that shelter away from SPACs and required the forecasts' assumptions, the sponsors' pay and the dilution to be set out [7]. In 2022, 86 listed [8].
The game on top
A SPAC sold a story before it had a company to tell it about, and for a while the market paid more for the story than for the company that arrived. Synthetic Demand is a satire of exactly that. You are the CEO of an invented company with one job: make the stock go up before you sell. The markets you can be dealt come from real years of market history; the shells of 2020 aren't among them yet.
Every call you make is graded A to F. There is no floor under you, and the hard part is still choosing when to get out.