SPAC Mania: When Blank Checks Went Mainstream

The Blank Check Machine

a SPAC a special purpose acquisition company is a shell with no business. No product no revenue no employees beyond a sponsoring team. A sponsor raises money in an initial public offering (IPO) usually at $10 a share deposits it in a trust account and promises to find a private company to merge with in about two years. The merger is called de-SPAC and makes the target instantly public without having to go through the traditional roadshow challenge and IPO underwriter scrutiny. SPACs existed for decades as a funding backwater a niche tool that no one paid much attention to. Then in 2020 they raised $83 billion in 248 deals more than the previous decade combined. In 2021 they went vertical: 613 SPAC IPOsThey raised about $162 billion. At the top athletes and musicians had their own vehicles with blank checks and their names on the door. I want to explain why that happened and why it collapsed the way it did because the mechanics explain almost everything that came after

Why Everyone Loved the Structure

Each party in a SPAC deal had a reason to like it and the reasons rarely overlapped. Private companies got a faster route to the public markets. Unlike a traditional IPO they could legally promote themselves using multi-year financial projections a genuine gift for pre-revenue companies whose entire pitch was a big story about the future. Sponsors got the promoteRetail investors gained access to venture-style companies they had never before been allowed to touch. And hedge funds came as close to risk-free trading as the public markets offer: buying at $10 collecting interest deposited in the trust and leaning on the embedded interest. right of redemption the option to get your $10 back instead of financing a merger you don't like all while maintaining free collateral as a bonus

Read that list again. Notice what's missing. No one in the chain was paid for the merged company's good performance after the deal closed. No one. That absence is the whole story and everything that follows in this piece goes back to it

The Arithmetic of Dilution: A Worked Example

Promotion and redemption rights seem like two separate features. Check them with real numbers and it turns out that they are the same problem with two hats. Here is a completely illustrative SPAC call it XYZ Acquisition Corp built with round numbers so you can check each step yourself

XYZ raises $300 million in its IPO: 30 million units at $10 each all placed in a trust. For simplicity I ignore the modest interest the trust earns while it waits since that does not change the shape of the story. The sponsor for a nominal payment that I will set at $25,000 receives shares of the founder equal to 20 percent of the company's total shares once the IPO closes. ThatIt means that the founders' shares are not 20 percent of the 30 million public shares. They are 20 percent of the combined total. If the public shares are 30 million and the founder's shares are equal to F and F is equal to 20 percent of 30 million plus F the algebra results in F equals 7.5 million. Check it out: 7.5 million divided by a total of 37.5 million is exactly the20 percent. So the sponsor put up $25,000 and owns a stake that valued at the trust value of $10 is worth $75 million. That's a three-thousand-fold return before the sponsor has found a single target and explains the deadline pressure better than any regulatory filing

Now XYZ finds a target and announces a merger. This is where the bailout comes into play.Each public shareholder can vote in favor of the deal and still redeem their own shares for the original $10 instead of transferring them to the combined company. Suppose 60 percent of the public shares are redeemed a rate that was common once the boom of 2021 turned into the relaxation of 2022. That's 18 million of the 30 million public shares cashed in at $10 each removing 180 milliontrust dollars. To merge with the target there are only 120 million dollars and 12 million public shares left

Look what happened to the headline. The deal was announced as a $300 million transaction because that's what the trust had from day one. The company that actually comes forward to run the deal will receive $120 million 60 percent less than the figure in every press release about the deal

Now look at the ownership. Before the redemptions the public owned 30 million of 37.5 million shares 80 percent of the company and the sponsor's founder shares were the remaining 20 percent. After the redemptions the shares remaining outstanding are 12 million public shares plus the same 7.5 million founder shares 19.5 million in total. Public ownership falls to 12 divided by 19.5 about61.5 percent. The sponsor's stake which did not change the number of shares at all increases to 7.5 divided by 19.5 about 38.5 percent. The sponsor's stake in the company almost doubled from 20 percent to 38.5 percent without the sponsor contributing a single dollar more. Redemptions reduce the denominator. A fixed number of founder shares on top of a decreasing number of shares is a mechanical way to dilute stillmore and it happens to the shareholders who stayed those who believed enough in the agreement not to ask for their money back

These are dilution and cash shortfalls arising from the same mechanism. The higher the redemption rate the smaller the check the target actually receives and the larger the sponsor's portion of what remains. This is also why so many 2021-era deals relied on PIPE financing private investment in public equity raised alongside the merger specifically to plug the payback hole. The fact that plugging redemption holes has become a routine part of closingA SPAC deal indicates how common this exact math had become in 2022

The Incentive Math Plays Out

The flaws in the structure appeared in exactly the order their incentives predicted once you knew to look for them. Sponsors facing a two-year deadline paid high prices for everything on the table: electric vehicle startups flying taxi companies space companies many with a projection platform but no real product.a fraction of the core size of the trust. Post-merger shareholders the only part of the entire chain whose returns depended on the actual functioning of the business inherited cash-burning companies with valuations set at the most forgiving market in living memory. Nikola became the emblem of the entire era and I'll come back to that in a minute

The Regulators Arrive

Regulators arrived mid-party and once they did the party quickly ended. In April 2021 the SEC issued accounting guidance that required most SPAC collateral to be treated as liabilities rather than equity forcing sponsors to rewrite their books. That sounds like a technical note. It froze new issuance almost overnight because no one wanted to close a deal under rules that were still being rewritten. Later rules eliminatedthe safe harbor that had allowed sponsors to market optimistic multi-year projections without the liability exposure that comes with a traditional IPO prospectus. By 2022 with interest rates rising and speculative appetite gone redemption rates on pending deals routinely exceeded 90 percent. Hundreds of SPACs simply returned what was left in their trusts to shareholders and dissolved rather than pursue a deal no one wanted to fund

Case Study: Nikola and the Truck That Rolled Downhill

Nikola is the go-to case study for all finance professionals and earns its reputation. The company which planned to build electric and hydrogen semi-trucks went public in 2020 through a merger with a SPAC called VectoIQ Acquisition Corp. It had no trucks in commercial production. What it did have was a founder Trevor Milton who was an unusually good storyteller and a stock that briefly gave Nikola a market capitalization larger than that of Ford a century-old company that actuallymanufactures and sells millions of vehicles a year

The stock was executed based on the kind of projections a de-SPAC can make. General Motors announced that it would take a stake in Nikola and help design its planned pickup truck a big validating headline that moved the stock strongly. Then a short seller Hindenburg Research published a report alleging that some of Nikola's rallies were staged. The most cited example: a promotional video that appeared to show Nikola's truck driving under its own power was filmed letting the truck roll down a hill at pointMilton was later charged with securities fraud and wire fraud and was convicted a rare case in which a SPAC-era promotional claim ended up in actual criminal court rather than simply a stock price drop

What makes Nikola an example of clean teaching is not the fraud allegation itself. It's that everything before the fraud was legal. The SPAC structure legally allowed Nikola to show investors truck delivery projections years from now that a traditional IPO prospectus would never have allowed without much greater liability exposure. The fraud was that Milton allegedly lied about specific facts. But the SPAC gave him a stage with looser rules for telling them backed by a sponsor whose promotion depended on closing the deal before anyone would look.too much. The structure did not cause the fraud. It reduced the cost of telling a story long enough to get paid

The Case for SPACs: Where the Critique Overreaches

I've spent this entire article describing an incentive structure that produced poor results and I think that's fair. But the honest version of this argument isn't limited to accumulating SPACs so let me lay out the strongest arguments for the structure before returning to the rubble

A traditional IPO has a specific legal quirk that most retail investors never think about: It's dangerous to publish forward-looking financial projections. Underwriters and company lawyers keep projections vague or absent from a prospectus because the liability regime around IPO disclosures punishes an optimistic forecast that misses much harder than it rewards a conservative one that beats. That's a reasonable rule for a mature profitable company that sells stock based on numbers that already exist. It's a really bad fit for a company whose proposedTotal value is what it will be in five years not what it already is today

A SPAC merger was conducted under different disclosure rules at least until the safe harbor was reduced and that allowed a company with a truly long-term story to tell it with numbers instead of adjectives. Consider a company that is building something capital-intensive that will bring in years of revenue: a new type of battery a constellation of satellites a drug still in testing. A traditional IPO forces that company to wait until it has current financial data that investors can evaluate whichIt could take five or ten years and several rounds of private financing or go public with almost nothing to show and hope that investors take the story on faith. The SPAC route allowed him to show the model. Investors could see the assumptions discuss them and value the stock based on an actual multi-year plan instead of a vague narrative

The honest version of this argument has to admit that some of the companies that used the SPAC route in this way were telling the truth about a genuinely long-term business and a handful of them are still around and still executing something close to the original plan. The mania did not invalidate the use case. It flooded the use case with sponsors who wanted the promotion and had no intention of choosing a company whose five-year plan would actually stick. My honest reading is that the tool and the abuse of the tool merged into one.history in most people's memory and deserve to be separated although in practice the abuse comprised most of the volume

How I'd Actually Read a SPAC Deal

SPACs are much rarer in 2026 than they were in their heyday but they haven't gone away and the way you would evaluate one today is basically a checklist built entirely from the above mechanism

First I would go directly to the redemption rate of the most recent similar deals from the same sponsor or from the same era not the size of the master trust. The main figure is the ceiling. The redemption rate indicates how much of that limit is fiction. Second I would look at the sponsor's promotion and ask what percentage of the post-bailout company it represents not the percentage in the IPO. I was wrong the first time I read a SPAC filing. I looked at the 20 percent promotion figure in the prospectus andI assumed that was the dilution I was signing up for. It's not. It's the dilution at the time of the IPO before a single share is redeemed and the actual number almost always gets worse from there exactly as the arithmetic above shows

Third I would check to see if the deal needed a PIPE to close because the fact that a PIPE was necessary is itself a sign that the refunds were significant enough to threaten the deal's minimum cash condition. Fourth and this is the part I think most people skip I would read the projections in the merger proxy the same way you would read a startup's presentation rather than the way you would read an audited income statement because that is closer towhat they really are. The safe harbor exists precisely because projections are not audited the way financials are

None of this is a reason to never look at a SPAC. It's a reason to put a price on the promotion and redemption math before you put a price on the story because the story is the part that every sponsor knows how to tell professionally. This is not investment advice and I'm not telling you to buy or avoid any specific deal. It's simply the order in which I personally would work with the disclosures and I think it's a more honest order than starting with the projections which is exactly where marketing wants your attention first

The Scorecard From 2026

Looking back at the aggregate performance of the companies that SPACs took public during the boom it is among the worst of any asset cohort of the decade. The median deal lost most of its value from that $10 base. A handful of real companies including DraftKings used the route successfully and are still going strong today. That's important because it shows that the structure itself is a tool and not automatically a fraud. The mania was not the tool. It was the prices the deadline pressure andthe projections that added to it. SPACs will still be around in 2026 in much smaller numbers with stricter rules and sponsors who have accepted greater responsibility for what they close. That's roughly the epitaph that every financial innovation gets once it gets ahead of its own incentives

The Bottom Line

The SPAC mania was a lesson in incentive design done with $250 billion of real money. A structure that paid sponsors to close any deal allowed hedge funds to free ride on redemption rights and allowed market projections of targets that a traditional IPO would have kept off the page produced exactly what it was created to produce: hundreds of mergers and very little lasting value for whoever was left holding the shares. Run the arithmetic on the promotion rate andtrade before you run the story in your head because the story is always more flattering than the cap table. Before you buy any hot financial product research who gets paid when and why. The rise of SPACs remains the clearest evidence I know of an idea: the incentive diagram is the forecast