Case Detail

Case Summary

Technical Note: No Assets, No Products, No Business Plan: Risks Associated with Special Purpose Acquisition Companies

Case Number: 7-209-252, Year Published: 2009

HBS Number: KEL455

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Authors: David Stowell; Deepa Pai

Key Concepts

Hedge Funds, SPAC, IPO, Blank Check Company


A special purpose acquisition company (SPAC) is a blank check company that becomes incorporated and goes public with the intention of merging with or acquiring an undetermined company with the proceeds from an initial public offering (IPO). This process is often referred to as a “reverse IPO,” as the company collects investor capital before acquiring, merging, or even selecting a target company. Because there are no assets or operations at the time of investment, investors are essentially wagering on the potential future performance of a management team. The optionality embedded within a SPAC allows public investors to enter into a unique and sometimes profitable investment vehicle that appears to have limited downside risk. However, SPACs actually pose numerous risks that may not be self-evident to all but the sophisticated investor. With a total of 228 SPACs raising $35.8 billion of capital since 2003, this increasingly popular investment vehicle warrants further discussion of these underlying risks.

Learning Objectives

SPACs carry numerous risks, which are found in the following areas: SEC regulation, arbitrage risk, liquidation risk, and behavioral risk in the management team. The case enables the reader to analyze these risks and to develop an understanding of the structure of and underlying rationale for SPACs.

Number of Pages: 14

Extended Case Information

Teaching Areas: Finance

Geographic: United States

Industry: Hedge Funds and Investment Banks

Organization Size: Small

Year of Case: 2008