What Is a SPAC? How They Work and the Track Record

What is a SPAC?

A SPAC, or special purpose acquisition company, is a shell company that raises money through a public listing with the sole purpose of merging with a private company to take it public, effectively skipping the traditional IPO process. Instead of a private business filing its own prospectus and marketing itself to public investors over months, it merges into an already-listed shell, and the private company's shares start trading almost overnight. It sounds like a shortcut, and in many ways it is, but the shortcut has produced a genuinely mixed track record that every curious investor deserves to understand before forming an opinion.

The structure had a wild run between 2020 and 2021, cooled off sharply after that, and has been quietly rebuilding in 2025 and 2026 with a smaller, more disciplined set of sponsors. Understanding how SPACs work, why they surged, and what happened to the companies that came public through them tells you a lot about incentives, hype cycles, and the difference between access and quality in markets.

How does a SPAC actually work?

A SPAC raises cash from public investors through an IPO, holds that cash in a trust account earning interest, and then has a fixed window, typically 18 to 24 months, to find a private company to merge with. If it succeeds, the private company becomes publicly traded through the merger. If it fails to find a target in time, the trust money gets returned to investors, usually with a small amount of interest.

Here is the sequence in plain terms. A group of sponsors, often former executives, bankers, or industry specialists, forms a shell company and lists it on an exchange, usually at $10 a unit. That $10 per share sits in a trust account, untouched, while the sponsors go looking for a private business to merge with. Investors who bought into the SPAC are betting on the sponsor's judgment and network, not on any specific business, because at the time of the IPO there usually isn't one identified yet. This is why SPACs are sometimes called "blank check companies."

Once a merger target is announced, existing SPAC shareholders get to vote on the deal and can choose to redeem their shares for the original $10 plus accrued interest rather than roll into the new combined company. This redemption right is the safety valve that made early SPAC investing look low-risk: worst case, you get your money back with a bit of interest, similar in spirit to parking cash in a short-term instrument while the 10-year Treasury yield sits near 4.6% as of July 13, 2026.

The catch is what happens after the merger closes. Once the deal completes and the private company's shares start trading under a new ticker, the redemption protection disappears and everyday investors are holding equity in an operating business, often unprofitable, often unproven, at a valuation set largely by the sponsor and the target's management during private negotiations rather than by public market price discovery.

Why did SPACs become so popular, and why did the boom fade?

SPACs surged because near-zero interest rates in 2020 and 2021 pushed investors toward speculative growth stories, and the SPAC structure offered private companies a faster, less scrutinized path to public markets than a traditional IPO. Over 600 SPACs raised more than $160 billion in 2021 alone, according to data compiled by SPAC Research, a pace that dwarfed every prior year combined.

That boom happened against a very different macro backdrop than today's. The 3-month Treasury bill yield currently sits at 3.70%, a useful proxy for the effective fed funds rate, compared to the near-zero rates of 2020 to 2021 that made speculative, pre-revenue companies far more attractive relative to cash or bonds. When money is nearly free, investors are more willing to pay up for a story about what a company might become in five years. When the 10-year Treasury yield sits above 4.5%, as it does now, that same story has to compete against a genuinely attractive risk-free return, and the math gets much less forgiving for speculative equity.

The unwind was brutal. The De-SPAC Index, which tracked companies that had completed SPAC mergers, fell sharply from its 2021 peak through the end of 2022, with widely cited estimates placing the decline at more than 70%. Household names like Lordstown Motors and Virgin Orbit, both taken public via SPAC, eventually filed for bankruptcy. A well-known academic study by professors Michael Klausner, Michael Ohlrogge, and Emily Ruan found that SPAC mergers completed during this period delivered deeply negative median returns within a year of the merger closing, dramatically worse outcomes than companies that went public through traditional IPOs over the same period.

What does the SPAC landscape look like in 2026?

The market today is smaller and more selective than during the 2021 peak, but SPACs have not disappeared. Issuance in 2025 and into 2026 has run at a fraction of the 2021 pace, with sponsors increasingly targeting specific sectors like energy transition, defense technology, and AI infrastructure rather than the broad speculative grab-bag of the earlier boom.

Regulatory changes have also reshaped the structure. The SEC finalized rules in 2024 that tightened disclosure requirements around projections made during SPAC mergers and, critically, removed the safe harbor that had previously shielded forward-looking statements in de-SPAC transactions from the same legal liability that traditional IPO underwriters face. That has raised the cost and legal risk of running a SPAC, which partly explains the smaller, more disciplined issuance volume since.

Broader risk appetite in the market today looks calmer than in 2021 as well. The VIX, a common measure of expected market volatility, sits at 16.31, down 1.15% on the day, a level associated with relative calm rather than the kind of speculative fervor that fueled the SPAC boom. Compare that to early 2021, when retail trading volumes and speculative positioning were running well above historical norms. A quieter volatility backdrop generally means less appetite for the kind of story-driven, pre-revenue bets that defined the SPAC boom's biggest winners and biggest losers alike.

Today's deal-making headlines offer an interesting counterpoint. Stripe and Advent International have reportedly teamed up to bid more than $53 billion for PayPal, a company that has been publicly traded for years and whose share price has been under sustained pressure. A take-private bid is the mirror image of the SPAC story: instead of using a shell company to rush a private business onto public markets, deep-pocketed buyers are pulling a struggling public business back behind private doors, where they can restructure it away from quarterly earnings scrutiny. Both paths illustrate the same underlying truth: the route a company takes to or from public markets shapes the risk profile investors face, sometimes more than the underlying business itself.

Meanwhile, rising gasoline prices, with some forecasts calling for $4 per gallon within days as Trump's new Iran blockade threatens oil supply, could add a wrinkle for energy-transition SPACs. Higher fuel costs tend to accelerate policy interest in alternative energy, which may benefit sponsors targeting clean-energy mergers, but they also tighten consumer wallets and raise input costs across the economy, creating a more uncertain environment for any capital-intensive startup seeking public-market funding.

What should a curious investor take away from the SPAC track record?

The practical lesson is not that SPACs are inherently good or bad. It is that the structure separates the safety of the pre-merger period from the risk of the post-merger period, and a lot of investors in 2021 did not fully appreciate that distinction. Buying a SPAC before it announces a target is a very different bet than buying shares in the combined company after the merger closes.

Before a merger, you are effectively holding a claim on a trust account earning modest interest, with a redemption option that limits your downside. After a merger, you are holding equity in an operating business, subject to all the normal risks of growth-stage companies: unclear profitability, execution risk, and a valuation that was negotiated privately rather than tested by public market demand the way a traditional IPO roadshow tests it.

Our daily research across 250+ tickers shows that de-SPAC companies as a group have historically displayed higher volatility and wider dispersion of outcomes than companies that reached public markets through conventional IPOs, even within the same sectors. That dispersion matters more than any single average return figure, because it means the SPAC path has produced both some of the market's most disappointing outcomes and a smaller number of durable, well-run businesses that happened to use this route to go public. Sorting one from the other requires the same fundamental homework, revenue quality, margin trends, management incentives, that applies to any equity research, SPAC-originated or not.

For readers building out a broader research habit, our archive at /blog covers related structures like direct listings and traditional IPOs, which offer useful points of comparison for thinking through how different paths to public markets shape investor risk. And for anyone who wants to see how specific research subjects have performed over time rather than relying on a single snapshot, the /scorecard page tracks the history behind our research calls.

A closing thought

The SPAC structure is not a shortcut to better returns. It is a shortcut to public listing, and those are two very different things. The trust-account safety net that made early SPAC investing feel low-risk disappears the moment a merger closes, and what is left is an ordinary equity bet dressed up in an unusual wrapper. With the 10-year Treasury yield near 4.6% and short-term rates around 3.7%, the opportunity cost of parking money in a speculative, pre-revenue business is higher than it was during the zero-rate years that first fueled the SPAC boom.

If you are evaluating a company that came public through a SPAC merger, the useful question is not how it got to the public markets. It is whether the underlying business would look attractive to you if it had arrived there through a conventional IPO instead. Would the numbers hold up on their own merits, separate from the structure that delivered them to the ticker tape?

Research output, not investment advice. The material above is observational and educational. The operator of Observed Markets may hold personal positions in subjects studied here (disclosed at observedmarkets.com/conflicts-of-interest). Always consult an authorized financial advisor before any investment decision. Past observed outcomes do not predict future results.