In 2020, while cryptocurrency and Bitcoin dominated financial headlines, Special Purpose Acquisition Companies (SPACs) experienced remarkable growth with a 462% year-over-year increase in capital raised. This trend continued into 2021, making SPACs a significant investment vehicle worth examining from an Islamic finance perspective.

What Are SPACs?

A Special Purpose Acquisition Company represents a sophisticated mechanism for raising capital – essentially accumulated funds designated for mergers. These are shell-like corporate structures that become publicly traded to gather cash for acquiring private enterprises. Private companies can merge with SPACs as an alternative pathway to conventional Initial Public Offerings (IPOs).

The surge in SPAC popularity stems from increasing corporate preference for SPAC acquisitions over traditional IPO processes. In 2020, SPACs represented over 50% of all IPO proceeds, establishing them as a dominant force in public market entries.

The SPAC Process

Stage 1: Formation and Structure

A sponsor entity establishes the special purpose acquisition company to raise capital through public offering, enabling future private company mergers. These entities typically incorporate in Delaware or the Cayman Islands for regulatory advantages.

Stage 2: Initial Public Offering

The IPO’s primary objective involves raising necessary funds for private company mergers. Capital raised equals the number of units issued multiplied by the IPO price, typically set at $10 per unit.

Each unit comprises one common share plus one warrant. This structure establishes the $10 redemption value for common shares, with warrants provided as IPO participation incentives.

Warrants function similarly to options, granting holders rights to purchase additional company shares at predetermined prices regardless of market conditions, valid until warrant expiration.

SPACs must complete acquisitions within two years or return the $10 per share redemption value to investors.

Stage 3: Post-IPO Operations

Following successful capital raising, funds transfer into blind trusts pending management’s acquisition target selection. Separate trustees manage these trust accounts, with strict disbursement restrictions limited to acquisition completion or shareholder refunds upon liquidation.

Trust account interest may offset operational expenses, though sponsors typically provide additional funding for SPAC management costs.

Share prices generally remain near the $10 IPO level during this phase due to minimal material developments and absence of target company speculation.

After 52 days post-IPO, units can separate into independently tradeable common shares and warrants.

As acquisition targets near finalization, SPACs progress through distinct phases: Letter of Intent filing, PIPE funding rounds for additional capital, definitive merger agreements, and shareholder approval votes.

Stage 4: Post-Merger Integration

Upon shareholder merger approval, stock tickers change to reflect the new combined entity. SPAC common shares convert to shares of the merged company.

Shariah Compliance Analysis by Investment Phase

Phase 1: IPO and Pre-Announcement Considerations

Initial Unit Purchases

From Islamic finance perspectives, share purchases remain permissible only when net assets aren’t entirely cash-based, or net assets are 100% cash but units are purchased at par value ($10.00/share). The SPAC satisfies Shariah screening requirements including:

• Interest-bearing debt to market capitalization ratio below 30%
• Interest-bearing deposits to market capitalization ratio under 30%
• Prohibited income representing less than 5% of total income

Warrant Considerations

While warrant purchases and trading generally present Shariah concerns similar to options trading, SPAC unit purchases containing shares and warrants may be permissible based on:

• Warrant subordination to the primary share component
• Islamic jurisprudence precedents permitting subordinate right sales when attached to valid assets
• Established Fiqh principles allowing subordinate trading of items impermissible when sold independently

Unit Trading Restrictions

Trading units remains impermissible except at par value when underlying assets consist entirely of cash. Investors seeking position liquidation must do so at par value, with any capital gains during pre-announcement phases requiring purification when assets remain 100% cash.

The AAOIFI Shariah Standard explicitly prohibits trading corporation shares when corporate assets consist exclusively of cash, except at nominal values with delivery conditions.

Independent warrant trading after the typical 52-day unit separation period violates Shariah compliance requirements.

Phase 2: Post-Target Announcement Analysis

Business Activity Screening

Upon target company announcement, Muslim investors must evaluate business activities for Shariah compliance. Prohibited target companies include those involved in:

• Conventional finance (non-Islamic banking, finance, insurance)
• Alcohol production or distribution
• Pork-related products and non-halal food operations
• Unlawful entertainment (gambling, casinos, cinema, music, pornography, hotels)
• Tobacco products
• Weapons, arms, and defense manufacturing

Non-Compliant Target Scenarios

When target companies fail Shariah compliance, SPAC share purchases become impermissible based on AAOIFI standards requiring permissible corporate objectives for valid share issuance.

SPAC shareholding in non-compliant acquisitions constitutes direct assistance in prohibited activities’ proliferation, representing I’anah ‘alal Ma’siyah (assisting in sin) considering the SPAC’s stated intentions.

Existing investors must divest holdings immediately upon non-compliant target announcements, purifying any gains earned from announcement dates onward.

Compliant Target Investment Conditions

For Shariah-compliant targets, unit or common share purchases become permissible under specific conditions when net assets aren’t entirely cash-based, or cash-only assets require par value purchases. Furthermore, standard Shariah screening criteria satisfaction (debt ratios, deposit ratios, prohibited income percentages).

Practically, SPAC shares cannot be purchased until post-acquisition completion or balance sheet diversification beyond pure cash holdings, as share prices typically deviate significantly from par values following target announcements.

Phase 3: Post-Merger Investment Standards

Post-merger investments follow standard Shariah equity screening criteria applicable to conventional stock investments.

Key Shariah Considerations for Muslim Investors

Critical Compliance Factors

Three essential considerations for Muslim SPAC investors:

1. Par Value Requirements: When underlying assets consist entirely of cash, units must be purchased at par value, prohibiting purchases/sales when prices don’t match net asset values
2. Interest Exposure Limits: Treasury deposits or interest-bearing account funds must remain below 30% of market capitalization
3. Screening Authority: Reputable Shariah stock screening applications with established Shariah boards provide acceptable compliance guidance

These guidelines ensure SPAC investments align with Islamic finance principles while navigating the complex regulatory and operational landscape of special purpose acquisition companies.

Original Article:

Islamic Finance Guru. (2025, July 28). Are SPAC investments halal or haram?https://www.islamicfinanceguru.com/articles/are-spac-investment-haram-or-halal