SPACs from Boom to Bust – a Re-emerging Capital Markets Alternative

Special purpose acquisition companies (SPACs) have once again begun to reappear in the global capital markets following one of the most dramatic boom-and-bust cycles in modern financial history. After a record-setting surge in 2020 and 2021, during which hundreds of SPACs raised hundreds of billions of dollars, the market experienced a sharp collapse amid regulatory tightening, poor post-merger performance, and heightened litigation risk. Following nearly three years of stagnation, 2024 and 2025 have shown early signs of a cautious, re-engineered return of SPACs as a capital-raising tool – this time under far stricter regulatory and market discipline.

This article provides an overview of SPACs, their structure, regulatory framework, recent historical developments, and the factors shaping their potential revival.

What is a SPAC?

A SPAC is a publicly listed shell company formed for the sole purpose of effecting a merger, share exchange, asset acquisition, or similar business combination with one or more operating companies. Unlike traditional operating companies, a SPAC has no commercial operations at the time of its initial public offering (IPO). Instead, it raises capital from public investors with the express intent of deploying that capital into a future acquisition, commonly referred to as the “de-SPAC” transaction.

Substantially all IPO proceeds are placed into a segregated trust account administered by an independent trustee. These funds may only be used to consummate a business combination or, if no transaction occurs within the stipulated period (typically 18 – 24 months), to redeem public shareholders. At the time of the business combination, public shareholders have the right to redeem their shares for their pro rata portion of the trust account, regardless of how they vote on the transaction.

SPAC Structure

Sponsor Promote and Incentives

SPACs are formed by a sponsor group – typically financial sponsors, industry executives, or private equity professionals. Historically, sponsors received a “promote” equal to 20% of post-IPO equity for nominal consideration.

Following investor backlash during the post-2021 downturn, the promote structure has evolved significantly. Current market practice increasingly includes reduced promote percentages (commonly 5-10%), performance-based earnouts, and vesting conditions tied to post-combination share price performance.

These changes aim to realign incentives between sponsors and public shareholders.

Securities Structure

SPAC IPOs traditionally consisted of units comprising one share of common stock, and one-half or one-third of a warrant. By 2024-2025, offerings have moved toward warrant-lite or warrant-free structures, reflecting investor concern about post-merger dilution. Where warrants remain, strike prices are now often set meaningfully above IPO price.

Trust Account Economics

Typically 100% (or nearly 100%) of IPO proceeds are deposited into the trust account. Interest accrues for the benefit of public shareholders, although a small portion may be used to offset franchise taxes and administrative expenses. If no transaction is completed within the specified timeframe, the trust is liquidated and returned to public shareholders.

Why SPACs?

From the sponsor’s perspective, SPACs offer a mechanism to raise significant public capital on a forward-looking thesis rather than historical operating performance. Compared with traditional private equity, the sponsor’s economic upside is equity-based rather than strictly tied to realized profits.

However, following the 2022-2023 market correction, sponsors now face greater capital at risk, tightened liability exposure, and increased scrutiny from regulators and investors. As a result, sponsors entering the 2025 market tend to be institutionally credible, well-capitalized, and industry-focused.

From the investor’s perspective, public shareholders benefit from downside protection via the redemption right, interest accrual on trust balances, and optionality through post-deal upside participation. Unlike the speculative frenzy of 2021, investors in 2025 approach SPACs as structured arbitrage-plus instruments than pure growth vehicles.

The IPO and de-SPAC Process

IPO Process

SPACs register their IPOs using Form S-1 for US issuers, and Form F-1 for foreign private issuers. Disclosure focuses on sponsor background, acquisition criteria, conflicts of interest, and dilution. Financial statements remain minimal due to the shell nature of the issuer.

Business Combination

Once a target is identified, the SPAC must undertake one of two regulatory paths – shareholder vote with proxy statement under Regulation 14A, or issuer tender offer under Regulation 14E. In either case, redemption rights are preserved. Financial statement requirements for the target must satisfy Regulation S-X and PCAOB audit standards.

The 2020-2021 SPAC Boom

Between 2020 and 2021, SPAC issuance reached unprecedented levels – over 600 SPAC IPOs, more than $160 billion in gross proceeds raised, widespread retail participation, and aggressive forward-looking projections and speculative valuations. SPACs became especially concentrated in electric vehicles, Fintech, biotechnology, and space and advanced materials.

However, by late 2021, post-combination performance deteriorated sharply. Many companies failed to meet projections, triggering massive share price declines, redemption rates frequently exceeding 90%, regulatory enforcement, and securities class actions.

Regulatory Overhaul: the SEC’s 2024 SPAC Rules

In January 2024, the US Securities and Exchange Commission adopted the most sweeping SPAC reforms in history. Key changes include: (a) underwriter liability for de-SPAC transactions, effectively eliminating the “lability gap” that existed under the traditional IPO framework; (b) enhanced dilution disclosure, including sponsor economics, PIPE financings, and redemption impacts; (c) projection liability reforms, subjecting de-SPAC projections to stricter standards; (d) target co-registrant requirements, making operating companies legally responsible for disclosures; and (e) shell company treatment confirmation, reinforcing restrictions under Rule 419-style protections.

These reforms fundamentally reshaped SPAC risk allocation and economics.

Litigation and Market Discipline

Following the 2021 peak, SPACs became one of the most litigated areas in US securities law. Key developments include shareholder class actions for misleading projections, derivative actions against directors and sponsors, heightened D&O insurance premiums, and collapse of PIPE investor participation.

By mid-2023, SPAC IPO issuance had nearly vanished.

The Re-emergence of the SPAC Market

SPAC activity has cautiously resumed in 2024-2025 under materially different conditions – fewer IPOs but higher institutional quality, smaller deal sizes, fully backstopped PIPEs, sponsor capital at higher risk, reduced dilution structures, and clearer alignment with long-term operating value.

Meanwhile, foreign private issuer SPACs – particularly from Asia and the Middle East – have begun to play a renewed role, especially in energy transition, infrastructure, and financial services.

Cross-border SPACs and Foreign Issuers

Foreign SPACs remain viable, but face tightening regulatory scrutiny. Developments include the SEC’s 2025 concept release on revising the definition of foreign private issuer, increased focus on home-country regulatory oversight, heightened disclosure standards for China-connected issuers, and strengthened PACOB audit inspection requirements.

These developments particularly affect Cayman-incorporated, China-headquartered SPAC structures that dominated earlier issuance cycles.

Key Challenges and Outlook

Despite renewed activity, SPACs continue to face structured headwinds – competition from traditional IPOs as interest rate volatility stabilizes, private equity continuation funds and structured exits, persistent investor skepticism, and high compliance costs under new SEC rules.

At the same time, SPACs retain one enduring advantage – speed to market for late-stage operating companies seeking liquidity without the unpredictability of book-built IPO pricing.

SPACs are no longer the speculative vehicles that dominated financial headlines in 2021. Instead, the 2025 SPAC is smaller, tighter, heavily regulated, institutionally controlled, and economically aligned. Rather than disappearing, SPACs appear to be evolving into a specialized capital-markets tool suited for highly regulated industries, cross-border listings, sponsor-led platform rollups, and energy and infrastructure monetization.

Conclusion

SPACs have completed a full financial lifecycle – emergence, explosion, collapse, and conditional re-emergence. While the excesses of the 2020-2021 era have been firmly extinguished by regulatory reform and market discipline, SPACs continue to offer a viable, albeit narrower, route to public markets for select issuers.

Whether SPACs will reclaim broad market relevance remains uncertain. What is clear is that any sustainable future for SPACs will now depend on rigorous governance, transparent economics, and genuine long-term enterprise value, rather than financial engineering.

Torres & Zheng at Law, P.C., regularly advises clients on IPOs, SPACs, and de-SPACs. If you would like us to assist with your transaction, please contact our team.