A SPAC forward purchase agreement (FPA) is a contract in which investors (often the SPAC sponsor or institutional investors) commit to buy a predetermined amount of SPAC units—typically consisting of common shares and warrants—at a set price upon the closing of the SPAC’s merger with its target company.
What Is a SPAC Forward Purchase Agreement?
A forward purchase agreement is signed either at the SPAC IPO or during negotiations with potential targets. Under this agreement, the investor agrees to provide additional capital at the time the merger is completed, which helps ensure the SPAC will meet its minimum funding threshold post-business combination.
How Does It Work?
- Commitment Date: The FPA becomes effective at IPO or in the lead-up to the merger.
- Unit Structure: The sponsor/investor will purchase specified units (e.g., shares + warrants) for a fixed amount, commonly $10 per unit.
- Settlement: On merger completion, the FPA investor provides the agreed funds and receives the units; e.g., a sponsor might commit to buy 1,000,000 units for $10 million.
- Purpose: FPAs help SPACs assure capital certainty for the combined entity and function as a deal “sweetener” to attract better acquisition targets and supplement trust proceeds if redemptions are high.
Strategic and Accounting Implications
- Investor Benefits: Investors can increase holdings at favorable terms and gain additional warrants, potentially benefiting from future upside if the post-merger company performs well.
- Dilution Risks: Issuing new shares and warrants as part of the FPA can increase share count, potentially diluting existing shareholders.
- GAAP Treatment: FPAs constitute equity forward contracts and must be accounted for as equity-linked instruments under U.S. GAAP.
Why Do SPACs Use Forward Purchase Agreements?
SPACs use FPAs to reinforce funding certainty, especially in deals where investor redemptions might reduce available cash at closing, and to enhance deal appeal for target companies by securing committed post-merger capital.
Forward purchase agreements have grown in importance as SPAC transactions have evolved and sponsors seek tools to ensure transaction success and stable funding for the new public company.
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