SPACs in the UK: How Special‑Purpose Acquisition Companies Work

Have you ever wondered if there’s a faster and more flexible way for businesses to go public than the traditional IPO? Or perhaps you’ve heard the term “SPAC” thrown about in the headlines and want to know how it works in the real world, especially here in the UK. The concept of Special Purpose Acquisition Companies (SPACs) has been shaking up financial markets across the globe, offering exciting new ways for private companies to access public investment - and for investors to get in at the ground floor of the next big thing. But SPACs aren’t just a buzzword. They come with their own legal, financial, and regulatory twists that affect founders, investors, and everyone eyeing the growth potential of UK business. If you’re a founder considering a SPAC as an alternative to a traditional IPO, or an investor looking to better understand the risks and rewards, it pays to get familiar with the details. In this guide, we’ll break down exactly what SPACs are, how they work from start to finish, the distinct benefits-and the risks-of getting involved, and what you need to know about the evolving UK legal landscape. If you want to make smart choices about SPACs, keep reading!

What Is a SPAC?

Let’s start with the basics: What does SPAC mean? A Special Purpose Acquisition Company (SPAC) is essentially a “blank cheque” company. It’s formed by a group of investors (known as sponsors) for the sole purpose of raising capital via an Initial Public Offering (IPO). Unlike conventional businesses, a SPAC has no commercial operations or assets when it first goes public. Its only job? To find and merge with, or acquire, an existing private company that wants to become publicly listed. So, if you see the question “what is a SPAC?” – at its core, it’s a vehicle to bring promising private companies to the public markets more efficiently and sometimes with less red tape than a traditional IPO. While SPACs have been around for decades, they’ve surged in popularity over the last few years, particularly in the US. Now, the UK is stepping up its regulatory framework to attract more SPAC activity.

How Do SPACs Work?

A typical SPAC journey looks like this:

1. Sponsor Formation: A team of experienced investors, entrepreneurs, or industry specialists (the sponsors) set up the SPAC as a shell company. Their reputation often helps attract investor interest.
2. Raising Capital through an IPO: The SPAC is listed on a public stock exchange and sells shares to raise money from both institutional and retail investors.
3. Putting Funds in Trust: The money raised is placed in a secure trust account. This ensures the capital is only used for acquiring a target company-or is returned to investors if a deal can’t be done.
4. Searching for a Target: The SPAC typically has up to two years to identify and acquire (or merge with) a private company. If a suitable business isn’t found in time, the SPAC liquidates, and investors get their money back.
5. Acquisition (the “De-SPAC” deal): Once the sponsors find a target, they propose a merger or acquisition. Shareholders vote on the deal. If approved, the private company replaces the SPAC on the stock exchange and becomes publicly listed-without going through the lengthy, rigorous IPO process.

Essentially, investing in a SPAC is a leap of faith: you’re putting up your money before knowing which company you’ll end up owning a piece of! For more on how the IPO route traditionally works, see our guide on incorporating a company in the UK.

Who Are the Key Players? Sponsors, Investors, and Targets

Sponsors

The sponsors are typically seasoned investors or industry experts with strong track records. They organise and promote the SPAC, handle the IPO process, then drive the search for a target company. As compensation, sponsors often receive a “promote” – a sizeable equity stake (sometimes up to 20%) in the acquired business, plus warrants or options that could be highly valuable if the share price rises after the acquisition.

Investors

SPAC investors can be anyone-from major institutions to individual retail investors. Initially, investors buy into the SPAC without knowing what company will ultimately be acquired, which is why SPACs are sometimes described as “blind pools”. However, investors usually have the right to redeem their shares and get their money back if they dislike the proposed acquisition.

Target Companies

For many growing private companies, being acquired by a SPAC can be a faster and nimbler route to a public market listing when compared to the demands of a conventional IPO. The SPAC structure can be particularly attractive for innovative tech firms, scale-ups, or businesses eyeing an accelerated capital raise. Are you thinking of launching your own venture? Check out our guide to getting help with starting a small business.

What’s the Difference Between a SPAC and a Traditional IPO?

This is one of the most common questions we get asked. Here’s a quick breakdown:

• Process: A traditional IPO involves detailed regulatory filings, roadshows to pitch to investors, heavy due diligence, and strict public disclosure requirements before listing. With a SPAC, most of this scrutiny happens after the shell company is already listed and once a target is selected.
• Speed and Certainty: SPAC mergers can usually be completed faster than traditional IPOs (often in a matter of months, rather than over a year). This can help targets avoid unpredictable market swings or delays.
• Costs: Both routes are expensive, but some companies find SPACs offer clearer, negotiated terms and lower upfront costs. However, sponsor fees and “promote” stakes can mean the dilution for founders is higher.
• Transparency: With SPACs, until a target is announced, investors have little insight into what business they will ultimately be investing in. Public scrutiny and due diligence ramp up only once a deal is on the table.

If you want to understand the different legal structures for businesses (company vs partnership etc), head over to our business structure comparison guide.

Why Would Companies and Investors Choose a SPAC?

Benefits for Companies

• Speed: The timeline for going public via a SPAC is often much shorter.
• Negotiated Terms: Companies can negotiate valuations and deal structure directly with the SPAC sponsors, providing greater certainty over pricing and timing.
• Access to Expertise: Many sponsors add value through industry connections, operational know-how, and capital raising experience.
• Less Market Volatility: Because the pricing is set privately, companies can be less exposed to the mood swings and uncertainty that often accompany a standard IPO.

Benefits for Investors

• Early Exposure: The chance to invest in exciting businesses before they become public.
• Redeem-ability: Most SPAC structures let investors pull out and get their capital back once a target is proposed, if they’re not happy with the selection.
• Diversification: SPACs can open doors to a range of fast-growth sectors and private companies that otherwise might not be accessible.

Benefits for Sponsors

• Upside Participation: Sponsors can profit handsomely if they find an attractive business and the post-acquisition company performs well on the market.
• Reputation Building: Successfully executing a smart SPAC deal can raise a sponsor’s profile and generate follow-on business.

What Are the Risks and Drawbacks of SPACs?

Of course, it’s not all smooth sailing. Here’s what all parties need to be aware of:

• “Blind Pool” Risk: Investors commit capital before they know which company will be acquired. If the sponsors choose poorly, returns can disappoint (or even go backwards).
• Alignment of Incentives: Sponsors could have strong incentives to do any deal-rather than the right deal-especially as the clock ticks down towards the liquidation deadline.
• Potential for Dilution: Sponsor promotes and warrants can dilute investor equity, sometimes reducing the value for original shareholders after the deal.
• Regulatory Complexity and Scrutiny: After recent controversy in global markets, UK regulators are scrutinising SPACs more closely, introducing new requirements to balance flexibility with strong investor protections.
• Reputation Risk: A string of failed or underwhelming SPAC deals could undermine confidence in this route, making capital raising more difficult in future.

For more about contracts and how to protect yourself from risk generally, you might want to see our article on why a lawyer should review your contract.

What’s Happening With SPACs in the UK?

With SPACs making big waves in the US, the UK’s own financial regulators have been reviewing rules to attract more SPAC listings and boost London’s competitiveness as a global capital market. Notably:

• In 2021, the Financial Conduct Authority (FCA) updated its Listing Rules with reforms designed to enhance flexibility, investor confidence, and transparency for SPACs. These included new guidance on investor protection mechanisms, such as letting investors redeem shares before a deal is finalised.
• The FCA moved to relax the triggers for suspending trading in SPAC shares when a target is announced, aligning more closely with US practice and making UK-listed SPACs more attractive to international sponsors and investors.
• There’s a growing focus on ensuring adequate disclosure, robust governance, and clear timelines for the use of funds-balancing innovation with market integrity and investor protection.

The UK government and regulators are actively courting global listings, and there’s ongoing consultation about how to keep rules competitive while safeguarding market standards. For founders, sponsors, and investors, this means the legal and regulatory landscape is dynamic-and staying on top of the current requirements is vital. If you want to delve into ongoing compliance and reporting requirements for listed companies, our resource on ongoing compliance and reporting requirements offers a helpful overview.

What Legal Documents and Structures Are Needed for SPACs?

From the outset, sponsors will need a suite of professionally drafted legal documents and the appropriate business structure to meet FCA and stock exchange requirements. These may include:

• Articles of Association – outlining the company’s rules and operations. Get expert help reviewing your Articles of Association here.
• Shareholder Agreements – setting out investor rights and sponsor obligations. We cover the essentials in our guide on shareholders agreements.
• Investment Agreements – governing the relationships between sponsors, investors, and target companies.
• Listing Rules Compliance – documents ensuring ongoing reporting and regulatory duties are met, crucial for market confidence.

SPACs must also ensure robust due diligence on any target and comprehensive disclosures to stakeholders, both as a matter of law and to maintain market trust.

Recent Developments and the Future of SPACs in the UK

While the SPAC surge slowed globally in late 2022 and 2023 (partly due to increased scrutiny and some high-profile under-performers), the UK has signalled a clear intent to cultivate a flexible, investor-friendly landscape for these vehicles-particularly given international competition from the US and other major exchanges. There’s also been debate about whether SPACs will encourage more innovative, tech-driven businesses to list in London. As the rulebook evolves, we can expect:

• Further consultation between regulators, market participants, and government to fine-tune SPAC regulations and keep London attractive for global listings.
• More focus on investor protection, disclosure standards, and sponsor responsibilities to ensure market integrity.
• Growing sophistication in how SPACs are structured and promoted, with lessons learned from both successes and challenges in other markets.

The bottom line: the regulatory and market environment for SPACs in the UK is proactive, but fast-changing. Whether you’re a founder, sponsor, or investor, getting tailored legal advice is essential to navigate the opportunities and avoid missteps.

Key Takeaways

• SPACs are publicly listed shell companies formed solely to acquire a private business, offering an alternative to the traditional IPO process in the UK.
• The process involves sponsors raising IPO capital, searching for a suitable target in a fixed timeframe, and merging or acquiring that company to bring it public.
• Benefits of SPACs include speed, negotiability, and early investor access, but risks include misalignment of interests, dilution, and the uncertainty of “blind pool” investing.
• The UK government and FCA have made regulatory changes to attract SPACs and ensure investor protection, but the landscape is rapidly evolving.
• SPAC sponsors, investors, and target companies all require robust legal structures and agreements to ensure proper governance, compliance, and deal execution.
• It’s important to seek legal advice specifically tailored to your circumstances before launching, investing in, or selling a business via a SPAC.

If you’d like advice on SPAC structures, regulatory matters, or business compliance, you can contact us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat. We’re here to help you navigate the legal aspects of modern business with confidence.