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The wave of deals involving special-purpose acquisition corporations (SPACs) has grabbed the space industry’s interest in the last few months. It’s also prompted more than a few people to ask: what, exactly, is a SPAC?

SPACs are an alternative way for companies to go public. They’re sometimes called “blank check companies,” which is an apt description. A SPAC forms and goes public through a traditional initial public offering. The SPAC uses the proceeds of that IPO to merge with a private company, allowing it to go public without itself going through a lengthy IPO process. A SPAC typically has two years to complete a deal or return its proceeds to shareholders.

SPACs are not new, having been used since the 1990s. Virgin Galactic, which kicked off the latest surge in SPACs in 2019, is not even the first space company to go public via a SPAC: Iridium went public by merging with a SPAC in 2009. However, SPACs are soared in popularity in the last year thanks to the speed and certainty they offered companies amid volatile markets.

According to SPACInsider, a site that tracks SPAC activity, there have been 246 IPOs of SPACs so far in 2021 as of March 11, nearly the same number as all of 2020. There’s even been a rise of “celebrity SPACs” whose backers range from former Speaker of the House Paul Ryan to retired baseball star Alex Rodriguez.

“I’ve been in the capital markets for 20 years and I’ve never seen a time like this,” said Karen Snow, head of U.S. East Coast listings and capital markets at Nasdaq, during a January webinar organized by IPO-Edge on the state of space investment. “The markets are very accepting of growth companies right now.”

Such companies, which have little revenue now but project strong increases in the next few years, are good fits for SPACs, she argued. Because such deals are mergers, rather than traditional  IPOs, different securities rules apply, including the ability to provide more information on those future projections. “The company can really communicate its plans and projections, and has perhaps a better opportunity to get credit for those projections,” she said.

“Typically, SPACs are able to justify higher values than typical IPOs because they are focused on growth numbers four to five years out, rather than one to two years out,” said Dylan Taylor, chairman and chief executive of Voyager Space Holdings. “They work well for highly capital intensive business with very substantial back-ended growth.”

SPAC deals are often accompanied by a parallel funding round known as a private investment in public equity, or PIPE. That allows a company to raise additional money beyond the proceeds of the SPAC and show the market it’s gone through a due diligence process. “It’s a signal to the marketplace that, once a deal is announced, it’s been vetted with the investment community already,” Snow said.

This article originally appeared in the March 15, 2021 issue of SpaceNews magazine.

Jeff Foust writes about space policy, commercial space, and related topics for SpaceNews. He earned a Ph.D. in planetary sciences from the Massachusetts Institute of Technology and a bachelor’s degree with honors in geophysics and planetary science...