What is a SPAC, and why do companies use them?

Stephanie Hughes Mar 25, 2024
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Trump Media & Technology Group could start trading on the market as early as today thanks to an assist from a SPAC. Joe Raedle/Getty Images

What is a SPAC, and why do companies use them?

Stephanie Hughes Mar 25, 2024
Heard on:
Trump Media & Technology Group could start trading on the market as early as today thanks to an assist from a SPAC. Joe Raedle/Getty Images
HTML EMBED:
COPY

Trump Media & Technology Group, the parent company of social media platform Truth Social, could begin trading on the public markets as early as today. This comes after shareholders in a special purpose acquisition company called Digital World Acquisition Corporation approved a merger with Trump Media on Friday.

On its website, Digital World calls itself “a blank check company.” But what exactly is a special purpose acquisition company, or SPAC?

In short, it’s a company that goes through its own initial public offering, and then sits tight while it looks for a private company to merge with. 

“Usually when SPACs are listed, they don’t have operations,” said Nerissa Brown, a professor at the Unviersity of Illinois Urbana-Champaign. “So it’s literally an empty shell.”

When the SPAC completes its merger with a private company, then the private company — in this case, Trump Media — automatically becomes public. 

One reason private companes use SPACs is that they’ll generally get a higher valuation that they would in a traditional initial public offering, said NYU Law professor Michael Ohlrogge. “So it’s a bet that, on average, pays off for companies,” he said.

But it does cost at least twice as much for a company to go public with an SPAC, said Ohlrogge, who has advocated for new SEC rules that would require more disclosures around those costs.

“Trying to make it more clear to investors how much of their money is getting drained away by the SPAC’s costs,” he said.

The new rules won’t be in effect until later this year, Ohlrogge said, meaning they won’t immediately impact the Trump Media deal. 

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