The Abu Dhabi stock market. Image Credit: Gulf News Archives

The Abu Dhabi Securities Exchange (ADX) and Abu Dhabi’s Department of Economic Development (DED) on Tuesday have submitted a proposal to the regulator - Securities and Commodities Authority (SCA) - for the introduction of an SPAC framework, which would be the first such in the Gulf (detailed report here).

The proposed framework will facilitate initial public offerings of SPACs, providing investors worldwide with access to growth opportunities.

What is a SPAC?

A SPAC (special purpose acquisition company) is a company that is formed with the sole purpose of raising funds through an initial public offering (IPO).

The capital raised is used to acquire an existing company. Subsequently, the target company merges with the publicly traded SPAC and becomes a listed entity. In this case, the operating company is not required to launch its own IPO, but it still gets access to public funds.

A SPAC’s target company is required to be completely ready to become a public entity within a fixed timeline.

According to accounting firm PricewaterhouseCoopers, a SPAC's sponsor or management team holds roughly 20 per cent interest in the company, while the remaining 80 per cent is offered to public shareholders.

Following the IPO, the SPAC has a fixed timeline within which it must acquire the target company. If the merger or acquisition fails to take place, the SPAC liquidates and the IPO proceeds are returned to the shareholders.