Chapter 25: Special Purpose Acquisition Company (CAIIB – Paper 3)
1. What is the primary purpose of a Special Purpose Acquisition Company (SPAC)?
A. To operate as a traditional manufacturing company
B. To provide banking services
C. To raise capital through an IPO and acquire a private company
D. To act as a regulatory body for financial markets
A SPAC is formed to raise funds through an IPO with the purpose of acquiring an existing private company, allowing it to go public without a traditional IPO process.
2. Which of the following is an advantage of SPACs for investors?
A. Opportunity to invest in private companies before they go public
B. Guaranteed high returns with no risk
C. Direct involvement in company management
D. Immunity from market fluctuations
Investors in SPACs get early exposure to companies that may become publicly traded, potentially benefiting from growth before the general public can invest.
3. What is a common disadvantage of SPACs?
A. They cannot raise funds through IPOs
B. Investors have no liquidity until the SPAC merges
C. They are heavily regulated and cannot operate freely
D. The acquired company may underperform, risking investor capital
One disadvantage is that the target company acquired by a SPAC may not perform as expected, potentially resulting in losses for investors.
4. How does a SPAC differ from a traditional IPO?
A. SPACs do not raise capital through public offerings
B. SPACs raise capital first and then find a company to acquire
C. SPACs are government-owned entities
D. SPACs require shareholder approval for every business decision
Unlike a traditional IPO where a company raises funds while going public, a SPAC first raises capital and later identifies a private company to merge with.
5. Which statement is true about the timeline of a SPAC?
A. SPACs typically have a fixed period to identify a target company, often 18–24 months
B. SPACs can operate indefinitely without a target
C. SPACs must complete acquisitions within 6 months
D. SPACs automatically dissolve after 1 year
SPACs are generally required to complete an acquisition within a defined period, usually 18–24 months, or return the funds to investors.
6. Who typically sponsors a SPAC?
A. Any retail investor without experience
B. Government agencies
C. Experienced investors or private equity firms
D. Banks acting as commercial lenders
SPACs are typically sponsored by experienced investors, private equity firms, or industry veterans who have expertise in identifying acquisition targets.
7. What is the usual timeframe for a SPAC to identify a target company after IPO?
A. 18–24 months
B. 6–12 months
C. 3–6 years
D. There is no fixed timeframe
After raising capital through an IPO, a SPAC usually has 18–24 months to identify and merge with a suitable target company.
8. What happens if a SPAC does not complete an acquisition within the specified timeline?
A. The SPAC continues operations indefinitely
B. The SPAC is liquidated and funds are returned to investors
C. The SPAC merges automatically with any listed company
D. The sponsors are required to inject additional capital
If a SPAC cannot complete an acquisition within its defined period (typically 18–24 months), it is liquidated, and the IPO proceeds are returned to investors.
9. During the SPAC formation, what is the primary role of underwriters?
A. Choosing the target company
B. Managing post-merger operations
C. Acting as a sponsor
D. Assisting in raising funds through IPO and marketing the SPAC
Underwriters help a SPAC raise capital by marketing the IPO to investors and ensuring the SPAC successfully lists on the stock exchange.
10. What is typically included in the SPAC timeline from formation to merger?
A. Formation, IPO, target search, merger, post-merger operations
B. IPO only, no further steps
C. Merger first, IPO later
D. Target search without raising funds
The SPAC process involves its formation, raising funds through an IPO, searching for a target company, completing the merger, and then operating the combined company post-merger.
11. Who are the primary stakeholders in a SPAC merger?
A. Only the sponsors of the SPAC
B. Sponsors, public investors, and target company shareholders
C. Only the IPO underwriters
D. Government regulators exclusively
The key stakeholders in a SPAC merger include the sponsors, public investors who bought SPAC shares, and shareholders of the target company being acquired.
12. What is the main purpose of the shareholder vote in a SPAC merger?
A. To approve the SPAC IPO pricing
B. To elect the board of directors
C. To approve or reject the proposed acquisition of the target company
D. To set post-merger dividend policies
Shareholders of a SPAC vote to approve or reject the proposed acquisition of the target company, ensuring that the merger aligns with their investment interests.
13. Which of the following is a common benefit of a SPAC merger for the target company?
A. Avoiding all regulatory compliance
B. Full control over SPAC operations post-merger
C. Immediate exemption from taxation
D. Faster access to public capital and liquidity
A primary benefit for the target company is gaining faster access to public capital and liquidity without going through the traditional IPO process.
14. What risk do public investors face in a SPAC merger?
A. The target company may underperform, affecting share value
B. Investors have no voting rights
C. Sponsors cannot lose their capital
D. The SPAC IPO funds are immediately distributed as dividends
Public investors face the risk that the acquired company may underperform post-merger, which can lead to a decline in share value.
15. Which party typically holds “founder shares” in a SPAC?
A. Retail investors participating in the IPO
B. SPAC sponsors and management team
C. Target company employees
D. Underwriters of the IPO
Founder shares are held by the SPAC sponsors and management team, giving them a significant stake and incentive in completing a successful acquisition.
16. Which of the following is a key characteristic of a SPAC?
A. It operates as a traditional business from inception
B. It generates revenue before any acquisition
C. It is a shell company formed to raise capital for acquiring a target
D. It is funded exclusively by government grants
A SPAC is essentially a shell company with no commercial operations at the time of formation, created to raise funds through an IPO to acquire a private company.
17. What is the first step in the SPAC process?
A. Target company merger
B. Formation of the SPAC by sponsors
C. Post-merger operations planning
D. Distribution of dividends to investors
The SPAC process begins with its formation by experienced sponsors, who later raise capital through an IPO to acquire a target company.
18. In SPAC capital structure, what are “warrants” typically used for?
A. To provide additional upside potential to investors post-merger
B. To pay dividends to sponsors
C. To fund operational expenses of the SPAC pre-merger
D. To guarantee a fixed return to IPO underwriters
Warrants in a SPAC capital structure allow investors to purchase additional shares at a set price post-merger, providing potential upside beyond the initial investment.
19. Which of the following is part of a SPAC’s post-IPO capital structure?
A. Only sponsor equity
B. Only debt instruments
C. Only retained earnings
D. Sponsor shares, public shares, and warrants
The capital structure of a SPAC after IPO typically includes shares held by the public, founder/sponsor shares, and warrants issued to provide additional incentives to investors.
20. What distinguishes a SPAC from a traditional acquisition?
A. SPACs require target companies to be already publicly listed
B. SPACs raise capital first and then find a target to merge with
C. SPACs operate like venture capital funds with multiple portfolio companies
D. SPACs avoid shareholder approval for mergers
Unlike traditional acquisitions, a SPAC raises funds first through an IPO and only later identifies a private company to merge with, providing a faster route to public listing.
21. What is the purpose of the SPAC trust account?
A. To hold IPO proceeds until a target company is acquired
B. To pay sponsor bonuses pre-merger
C. To fund the daily operations of the target company
D. To distribute dividends to public investors immediately
The SPAC trust account holds the funds raised from the IPO securely until a target company is identified and the merger is approved.
22. How do SPAC warrants benefit investors?
A. They provide guaranteed dividends regardless of company performance
B. They allow investors to purchase additional shares at a fixed price post-merger
C. They act as collateral for the SPAC’s debts
D. They enable investors to manage the SPAC’s operations directly
SPAC warrants give investors the right to buy additional shares at a predetermined price after the merger, providing potential upside beyond the initial investment.
23. What is a forward purchase in the context of SPACs?
A. Buying shares in the target company before SPAC formation
B. A government-mandated investment by regulators
C. An agreement where investors commit to buying shares in the SPAC post-merger
D. An automatic sale of SPAC shares to underwriters
A forward purchase is an arrangement where investors agree to purchase additional shares in the SPAC after the merger, often to provide more capital to the combined company.
24. Which of the following is a characteristic of funds in a SPAC trust account?
A. They can be used freely for operational expenses pre-merger
B. They are distributed as dividends to sponsors immediately
C. They can be invested in speculative assets for high returns
D. They are legally restricted and invested in low-risk instruments until merger
Funds in a SPAC trust account are legally restricted to low-risk investments such as government securities to protect investor capital until a target is acquired.
25. Why might a SPAC include forward purchase agreements in its capital structure?
A. To secure additional funding for the merger or post-merger operations
B. To guarantee sponsor profits regardless of performance
C. To reduce public investor participation
D. To avoid shareholder approval for the merger
Forward purchase agreements allow the SPAC to raise additional funds from committed investors to support the merger or the combined company's operations post-merger.
26. What is the primary purpose of an IPO agreement in a SPAC?
A. To define post-merger dividend policies
B. To outline the terms, obligations, and rights of underwriters, sponsors, and investors during the IPO
C. To guarantee the success of the SPAC merger
D. To regulate the operations of the target company post-merger
The IPO agreement specifies the responsibilities and rights of all parties involved in the SPAC IPO, including underwriters, sponsors, and investors, ensuring a clear framework for raising capital.
27. What does the De-SPAC process involve?
A. Dissolving the SPAC without completing a merger
B. Listing the SPAC’s shares in the secondary market
C. The merger of the SPAC with the target company, completing the transition from a shell to an operating public company
D. Issuing forward purchase agreements to investors
The De-SPAC process refers to the phase where the SPAC merges with its identified target company, converting the shell SPAC into a publicly operating entity.
28. Which of the following is a critical step in the De-SPAC process?
A. Formation of the SPAC by sponsors
B. Raising IPO capital from the public
C. Issuing warrants to public investors
D. Obtaining shareholder approval for the merger
A critical step in the De-SPAC process is obtaining approval from SPAC shareholders to proceed with the merger with the target company.
29. During the De-SPAC process, what role do PIPE investors play?
A. Provide additional private funding to support the merger and growth of the combined entity
B. Act as underwriters for the SPAC IPO
C. Serve as regulators approving the merger
D. Manage post-merger operations of the target company
PIPE (Private Investment in Public Equity) investors provide committed capital during the De-SPAC process, helping finance the merger and support post-merger growth.
30. What is a key regulatory requirement in the De-SPAC process?
A. Sponsors must receive a fixed return regardless of merger success
B. SEC approval and disclosure of financial statements for the target company
C. Forward purchase agreements are optional
D. Public investors cannot vote on the merger
Regulatory compliance requires SEC approval and full disclosure of the target company’s financials during the De-SPAC process to protect investors and ensure transparency.
