SPAC and de-SPAC Explained: How Sponsors and Target Shareholders Get Paid

In recent years, Special Purpose Acquisition Companies (“SPAC”) have emerged as a prominent alternative to traditional initial public offerings, offering sponsors and private companies a flexible and efficient path to the public markets. While much attention has been given to deal execution and regulatory considerations, a key question for market participants remains: how and when do sponsors and target shareholders actually realize economic returns from a SPAC transaction?

Unlike a traditional IPO, where selling shareholders may receive immediate proceeds, a de-SPAC transaction often delivers value primarily in the form of equity in the combined public company. As a result, liquidity is not always immediate and depends on a range of factors, including transaction structure, contractual restrictions, and applicable securities laws.

This article provides a practical overview of the SPAC and de-SPAC lifecycle and examines how sponsors and target shareholders ultimately monetize their investment following the closing of a business combination.

What Is a SPAC and de-SPAC?

A Special Purpose Acquisition Company (“SPAC”) is a publicly listed shell company formed to raise capital through an initial public offering (“IPO”) for the purpose of acquiring a private operating business. A SPAC transaction generally unfolds in two key phases:

SPAC IPO Stage: Raising Capital

In the first phase, the SPAC prepares for and completes its IPO, raising capital as a publicly listed shell company:

• Formation and Sponsor Investment
  • The sponsor forms the SPAC and contributes nominal capital
  • In exchange, the sponsor receives founder shares, typically representing approximately 20% of post-IPO equity (subject to dilution)

• IPO Structuring and Filing
  • The SPAC prepares and files a registration statement on Form S-1 with the SEC
  • Units are structured (e.g., shares + warrants or rights)
  • Underwriters are engaged and underwriting terms are negotiated during this stage

• Pricing and Closing
  • The SPAC prices its IPO (typically $10 per unit)
  • Public investors subscribe for units
  • The IPO closes and the SPAC becomes a publicly traded company

• Trust Account Mechanics
  • A substantial portion of the IPO proceeds is deposited into a trust account, typically at least 90% of the gross proceeds from the IPO
  • Funds can only be used for:
    • Completing a business combination, or
    • Redeeming public shares

In the SPAC IPO stage, the goal is to raise capital, establish the capital structure, and position for an acquisition.

De-SPAC Stage: Business Combination

Following the IPO, the SPAC has a limited timeframe (typically 18–24 months, although this may vary depending on the terms of each transaction) to identify and complete a business combination. Once a target company (the “Target”) is identified, the de-SPAC process generally proceeds through three key stages: signing, filing, and closing.

• Signing Stage: Deal Execution
• The SPAC and Target negotiate and enter into a business combination agreement (“BCA”)
• Key terms are established at signing, including:
  • Valuation and merger consideration
  • Cash vs. equity mix
  • Earnouts and lock-ups
• The transaction is publicly announced

At signing, the business combination will be agreed between the SPAC and the Target, but not yet approved or consummated.

• Filing Stage: SEC Review and Shareholder Process

At the filing stage, the SPAC prepares and files the required disclosure documents, typically a Form S-4 or F-4 (registration statement/proxy statement). This filing generally includes:

• Target financial statements
• Risk factors and detailed disclosures of each entity
• Information about the business combination and the combined company

Following the initial filing, the SEC reviews the document and provides comments. The SPAC responds through amendments until the SEC declares the filing effective. Once the filing is declared effective, the SPAC proceeds with the shareholder approval process:

• The SPAC solicits shareholder approval of the proposed transaction
• Public shareholders are provided the opportunity to redeem their shares for cash from the trust account prior to the shareholder meeting

This is often the longest phase of the process, as it involves extensive regulatory review and investor decision-making.

• Closing Stage: Consummation of the Business Combination

After shareholder approval is obtained, the SPAC and the Target proceed to closing:

• The parties finalize and exchange closing documentation
• The business combination is consummated
• Funds in the trust account (net of redemptions) are released
• Consideration is delivered to the Target shareholders

Following closing:

• The combined company continues as the surviving entity. It becomes a publicly traded operating company and begins trading on a national securities exchange.

How Do Sponsors and Target Shareholders Realize Profits?

While the closing of the business combination marks the completion of the de-SPAC transaction, it does not necessarily result in immediate liquidity for sponsors or target shareholders. In most cases, these parties receive equity in the combined public company, and profits are realized when such equity is monetized through secondary market sales.

The timing and ability to monetize these shares depend on a combination of transaction structure, contractual restrictions, and securities law requirements, which together determine when and how liquidity can be achieved.

Sponsor Economics: How Sponsors Make Profits

• Equity-Based Returns

Sponsors do not receive cash compensation at closing. Instead, their returns are primarily derived from equity in the combined company. This typically includes founder shares, often referred to as the promote, which are acquired at a nominal cost and represent a meaningful ownership stake following the business combination, subject to dilution.

In some transactions, sponsors may also receive:

• Private placement warrants
• Earnout shares tied to post-closing performance

As a result, sponsor returns are directly linked to the post-closing trading performance of the company.

• Lock Up Restrictions

Sponsor shares are generally subject to contractual lock up restrictions, which limit the ability to sell shares immediately after closing. These restrictions typically last for a period of six to twelve months, although early release may be permitted if certain stock price thresholds are met.

Accordingly, sponsors are usually unable to immediately access liquidity at the time of closing.

• Rule 144 and Resale Limitations

After lock-up restrictions expire, sponsors are typically considered affiliates of the company and are therefore subject to resale limitations under Rule 144. These limitations may include restrictions on the volume of shares that may be sold, as well as the manner of sale and public information requirements.

Without registration, these constraints can significantly limit the speed at which sponsors are able to monetize their holdings.

• Resale Registration

To facilitate liquidity, most de-SPAC transactions include a commitment for the combined company to file a resale registration statement, typically on Form S-1 or F-1. This registration often covers sponsor shares.

Once the resale registration becomes effective:

• Sponsors may sell shares in the public market, subject to any remaining lock-up restrictions
• Rule 144 limitations are generally no longer applicable
• Practical Takeaway for Sponsors

In practice, sponsors realize profits by selling their shares over time following:

• The expiration of lock-up periods
• The effectiveness of resale registration

Their ultimate return depends on the market price of the shares at the time of sale, rather than at closing.

Target Shareholder Economics: How Target Shareholder Get Paid

• Cash and Equity Consideration

Target shareholders typically receive a combination of cash and equity consideration in the business combination. The cash portion, if any, is funded by the SPAC trust account, net of redemptions, and/or PIPE financing (private investment in public equity, whereby the SPAC raises additional capital through a concurrent private placement to institutional investors at or around the time of closing).

However, because public shareholders have the right to redeem their shares, the amount of cash available at closing may be significantly reduced. As a result, many transactions are structured to be predominantly equity-based.

• Equity as Deferred Liquidity

In most transactions, target shareholders receive shares of the combined public company. These shares represent deferred liquidity, as they must be sold in the market in order to generate cash proceeds.

• Lock Up Restrictions 

Target shareholders are typically subject to lock-up restrictions similar to those applicable to sponsors. These restrictions commonly last for six to twelve months following closing, although release conditions may vary depending on the transaction.

• Resale and Registration Considerations 

The ability of target shareholders to sell their shares depends on both registration status and whether the holder is considered an affiliate.

If the shares are covered by an effective registration statement, such as a Form S-4 or F-4 or a post-closing resale registration statement, target shareholders may generally sell their shares freely once lock-up restrictions expire.

If the shares are not registered, resale must rely on Rule 144. In this context:

• Non-affiliate shareholders may generally sell shares more freely after the applicable six-month holding period
• Affiliate shareholders remain subject to ongoing Rule 144 limitations

Earnout Arrangements

In many de-SPAC transactions, target shareholders may also receive additional shares through earnout arrangements. These shares are issued only if specified performance milestones are achieved, such as stock price targets or operational benchmarks.

This structure introduces additional timing considerations and ties a portion of the return to the future performance of the company.

Practical Takeaway for Target Shareholders

Target shareholders realize profits through a combination of:

• Cash received at closing (if any)
• Subsequent sales of public company shares

The timing of such liquidity depends on:

• Lock-up restrictions
• Registration effectiveness
• Applicable securities law requirements
• Market conditions

Key Takeaway

Across both sponsors and target shareholders, the de-SPAC transaction provides a pathway to participate in the growth of a newly public company. While liquidity is not always immediate at closing, the structure allows stakeholders to retain meaningful equity upside and benefit from the company’s long-term performance in the public markets.

With the right combination of transaction structuring, registration planning, and market timing, sponsors and target shareholders are well-positioned to realize significant value over time. Understanding these dynamics is essential to navigating the SPAC lifecycle and maximizing the economic opportunities it presents.

If you have any questions regarding SPAC or de-SPAC transactions, including sponsor economics and post-closing liquidity considerations, our team would be pleased to assist.

Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.