The Role of Escrow in SPAC Mergers –
The SPAC Boom and Why Escrow Matters
SPACs (Special Purpose Acquisition Companies) took Wall Street by storm, raising over $250 billion in 2020-2021. But what happens to investor money before a SPAC finds a target? The answer lies in escrow accounts—the financial safeguard that makes SPACs possible.
At Secured Trust Escrow, we’ve handled escrow for dozens of SPAC mergers. In this guide, we’ll break down:
✔ How SPAC escrow works (and why it’s legally required)
✔ The two critical phases where escrow protects investors
✔ What happens if a SPAC fails to merge
✔ Emerging trends in SPAC escrow structures
SPAC Escrow 101: How It Works
Phase 1: The IPO Stage
When a SPAC goes public, 100% of investor funds are held in escrow (usually Treasury bonds or money market funds). This ensures:
✔ Money can’t be misused by sponsors
✔ Investors get principal back if no deal happens
✔ Funds earn interest while awaiting a target
Key Stat: Over 90% of SPACs use third-party escrow agents like Secured Trust Escrow for IPO proceeds.
Phase 2: The Merger (De-SPAC) Stage
Once a target company is identified:
1. Escrow releases funds to complete the merger
2. Holdbacks protect against post-merger liabilities
3. PIPE (Private Investment in Public Equity) funds often enter secondary escrow
3 Critical Ways Escrow Protects SPAC Investors
1. Redemption Rights
Investors can demand their money back if they dislike the merger target. Escrow ensures:
✔ Funds are available for redemptions (which averaged 60%+ in 2022)
✔ Proper tracking of who opts out
2. Sponsor Incentives
The “promote” (typically 20% equity for sponsors) often vests only after:
✔ Successful merger completion
✔ Share price milestones (e.g., $12+/share for 90 days)
Escrow holds these shares until conditions are met.
3. Liability Holdbacks
Post-merger escrow accounts (usually 5-15% of deal value) cover:
✔ Misrepresentations in filings
✔ Unforeseen liabilities
✔ Working capital adjustments
The SPAC Escrow Timeline
| Stage | Duration | Escrow Function |
| IPO | 12-24 months | Safeguards 100% of investor funds |
| Letter of Intent | 1-3 months | Begins due diligence escrow releases |
| De-SPAC | 3-6 months | Manages redemptions, PIPE funding |
| Post-Merger | 6-24 months | Covers indemnification claims |
What Happens When SPACs Fail?
If no merger occurs within the timeframe (usually 18-24 months):
1. Escrow account liquidates holdings
2. Investors receive original investment + interest
3. Sponsors lose their upfront capital
2023 Data: About 15% of SPACs liquidated without deals.
Emerging Trends in SPAC Escrow
1. Staggered Escrow Releases
New structures where sponsor shares vest gradually based on performance metrics.
2. Crypto SPAC Escrows
Bitcoin/stablecoin escrow for blockchain-focused blank-check companies.
3. ESG-Linked Escrow
Holdbacks tied to sustainability targets post-merger.
Why SPAC Sponsors Choose Secured Trust Escrow
✔ SEC Compliance Expertise – We navigate complex SPAC regulations
✔ PIPE Transaction Experience – Coordinating multiple funding sources
✔ Custom Reporting – Real-time dashboards for sponsors and investors
Key Takeaways
1. Escrow is the backbone of SPAC investor protection
2. Two-phase system (IPO + merger) requires specialized handling
3. Redemption waves make experienced escrow agents essential
Launching a SPAC?
📈 Contact Secured Trust Escrow—California’s leading SPAC escrow provider.
