What is a SPAC?

• A. A merger and acquisition firm
• B. A type of investment fund
• C. A company created to raise capital through an IPO to acquire another company
• D. A government program for funding startups

Answer: (C)

A SPAC, or Special Purpose Acquisition Company, is specifically designed to raise capital through an Initial Public Offering (IPO) with the intent of acquiring an existing company. This structure allows investors to put money into the SPAC without knowing what company will ultimately be acquired, since the goal of the SPAC is to take a private company public through this merger process. Once the SPAC has raised sufficient funds, it identifies a target company to merge with, which enables that company to bypass the traditional IPO route and become publicly traded more efficiently.

The nature of SPACs fosters an expedited process for private companies seeking to enter public markets. Their creation to raise capital specifically for acquisition purposes is what distinguishes SPACs within the investment landscape, making this choice the correct one in understanding their role and function in finance.