Forward Purchase Agreements Explained

Last updated: May 20, 2026

What a Forward Purchase Agreement Is

A forward purchase agreement (FPA) is a binding commitment by an investor — typically the SPAC's sponsor, an affiliate of the sponsor, or a third-party institutional investor — to purchase a specified number of shares (and in some cases, warrants) of the SPAC at a predetermined price, with settlement occurring at or around the closing of the business combination. The FPA provides the SPAC with committed capital that supplements the trust account proceeds, ensuring that a minimum amount of cash is available to the combined company at closing regardless of redemption levels.

The forward purchase agreement is conceptually simple: it is a forward contract on the SPAC's shares. The buyer commits today to purchase shares at a future date (closing) at a price set today (typically $10.00 per share, matching the trust value). The SPAC gains certainty that the committed capital will be available; the FPA investor gains the right to acquire shares at a known price with the flexibility to structure the economics around the settlement mechanics.

How FPAs Differ from PIPEs

Both FPAs and PIPE financing provide committed capital to a SPAC at closing, but they differ in structure, mechanics, and regulatory treatment.

Source of Shares

In a PIPE, the investor purchases newly issued shares in a private placement. The combined company issues additional shares, increasing the total share count. In a traditional FPA, the investor purchases existing shares — either directly from the SPAC (newly issued) or in the open market — under a forward contract. The distinction affects dilution accounting and securities registration.

Timing of Commitment

PIPEs are raised after the target is identified, concurrent with the announcement of the definitive agreement. FPAs are often entered into at or before the SPAC's IPO — the commitment exists from the start, independent of any specific target. Some FPAs are signed later in the process, but the original SPAC-era FPA was a feature of the IPO documentation.

Registration and Disclosure

PIPE shares are sold under a Regulation D exemption and must be subsequently registered for resale. FPA shares, depending on the structure, may be acquired through the public market or through a separate private placement, each with its own registration pathway. FPA terms are typically disclosed in the SPAC's S-1 (if signed at IPO) or in the merger proxy (if signed later).

Pricing Flexibility

PIPE subscriptions are almost always at a fixed price per share. FPAs — particularly the newer OTC-structured variants — can embed more complex pricing mechanics, including discounts to the trust value, reset provisions, or formulas tied to the post-closing stock price.

Counterparty Profile

PIPEs attract a broad base of institutional investors (mutual funds, hedge funds, sovereign wealth funds). Traditional FPAs are typically limited to the sponsor and its affiliates, or to a small number of anchor investors with pre-existing relationships. The newer OTC-structured FPAs introduced a different counterparty profile — principally hedge funds specializing in SPAC arbitrage and structured products.

Traditional FPA Structure

The original form of the forward purchase agreement, common in SPAC S-1 filings from 2018 to 2021, had a straightforward structure:

1. At IPO: The sponsor (or an affiliated entity) enters into an agreement to purchase a specified number of units (shares plus warrants) at $10.00 per unit, with settlement at the closing of the business combination.
2. At closing: The FPA investor delivers the purchase price ($10.00 per unit multiplied by the committed quantity) and receives the units.
3. Effect: The SPAC receives additional cash at closing, supplementing the trust proceeds and providing a backstop against redemptions.

For example, PSTH (Pershing Square Tontine Holdings) included a $1 billion forward purchase commitment from Pershing Square's affiliated fund at the time of its IPO. This commitment, alongside the $4 billion trust, gave PSTH access to up to $5 billion of equity capital — a scale that positioned it to pursue large-cap targets. Though PSTH ultimately did not complete a merger, the FPA structure demonstrated how sponsors could use forward commitments to augment the trust and credibly approach larger deals.

AJAX (Ajax Financial Alternatives) included a forward purchase agreement in its IPO structure, with affiliated investors committing to purchase additional shares at closing. The FPA provided AJAX with incremental capital certainty, useful given the sponsors' stated interest in pursuing sizable targets in financial services and technology.

GSAH (GS Acquisition Holdings, sponsored by Goldman Sachs) similarly featured an FPA from Goldman Sachs-affiliated entities, committing to purchase shares at trust value at closing. The Goldman Sachs affiliation gave the FPA commitment additional credibility with potential targets, who could rely on the committed capital being funded.

The Role of FPAs in Reducing Redemption Impact

The forward purchase agreement addresses the same fundamental problem as the PIPE: the risk that high redemptions will drain the trust and leave the combined company cash-starved. But the FPA and PIPE attack the problem from different angles.

A PIPE raises entirely new capital from third-party investors who conduct independent diligence on the target. An FPA locks in capital from parties who are already aligned with the SPAC — typically the sponsor — and does so before any target is identified. The FPA thus provides structural certainty at the cost of independent validation; the PIPE provides independent validation but is subject to market conditions and investor appetite at the time of the deal announcement.

In practice, many SPACs use both instruments. A SPAC might enter the IPO with a $100 million FPA from the sponsor and subsequently raise a $200 million PIPE from institutional investors when the target is announced. The FPA provides a floor of committed capital; the PIPE provides additional capital and third-party validation.

Pricing Mechanics

Traditional FPAs: At Trust Value

The standard FPA price is $10.00 per share (or per unit, if the FPA includes warrants), matching the trust value. This creates clean economics: the FPA investor enters the combined company at the same effective price as non-redeeming public shareholders and PIPE investors.

The FPA investor's return depends entirely on the post-closing stock performance. If the combined company's stock rises above $10.00, the FPA investment is profitable. If the stock declines, the FPA investor bears the loss — there is no structural downside protection in a traditional FPA (unlike, say, a convertible PIPE with a fixed-income floor).

OTC-Structured FPAs: A Different Economics

Beginning in 2022, a new breed of FPA emerged — the OTC-structured or "recycled share" forward purchase agreement. This structure is materially different from the traditional FPA and has become the dominant form in the post-2022 SPAC market.

In an OTC-structured FPA, the mechanics work approximately as follows:

1. Before the redemption deadline: The FPA counterparty (typically a hedge fund) purchases SPAC shares in the open market, often at or slightly below trust value.
2. At the redemption deadline: Instead of redeeming those shares (which would drain the trust), the FPA counterparty holds them through the merger, keeping cash in the trust.
3. At or after closing: The FPA counterparty and the combined company settle the forward contract. The settlement mechanics vary, but typically involve the counterparty receiving a payment (in cash or shares) that effectively compensates them for not redeeming.

The economic effect is that the FPA counterparty is being paid to not redeem — similar in purpose to a non-redemption agreement, but structured as a forward contract with more complex settlement terms.

Pricing Components of OTC FPAs

OTC-structured FPAs embed several pricing elements:

• Discount to trust value. The FPA counterparty may acquire shares below trust value in the open market (e.g., at $9.80) and be entitled to a settlement at $10.00 or higher, capturing the spread.
• Reset price. Some OTC FPAs include a price reset mechanism: if the combined company's stock trades below a specified threshold after closing, the settlement price adjusts downward, limiting the counterparty's losses. This effectively transfers price risk back to the combined company.
• Maturity and early termination. OTC FPAs typically have a maturity date (e.g., 90 days to one year after closing) at which the forward settles. The counterparty may have the right to terminate early under certain conditions.
• Prepayment amount. Some FPAs include an upfront payment from the combined company to the FPA counterparty at closing — effectively a fee for keeping cash in the trust.

These structures are more complex than traditional FPAs and more closely resemble OTC equity derivatives than simple share purchase commitments. The pricing is negotiated bilaterally between the SPAC/target and the FPA counterparty, and the terms can vary substantially across deals.

Who Enters FPAs

Sponsors and Affiliates

In traditional FPAs, the counterparty is the sponsor or a fund affiliated with the sponsor. The sponsor's FPA commitment demonstrates confidence in the SPAC's ability to find and close a good deal. It also provides the sponsor with additional equity exposure beyond the founder shares — FPA shares are purchased at $10.00, not at the promote's near-zero cost basis, so they represent genuine capital at risk.

Anchor Investors

Some SPACs secure FPA commitments from institutional investors at the IPO stage. These anchor investors — often sovereign wealth funds, family offices, or large alternative asset managers — commit to purchasing shares at closing in exchange for favorable terms (e.g., additional warrants or a discounted purchase price). IPOF (Social Capital Hedosophia Holdings Corp VI) attracted anchor investor interest due to Chamath Palihapitiya's track record with prior SPAC vehicles.

Hedge Funds (OTC-Structured FPAs)

The OTC-structured FPA market is dominated by hedge funds that specialize in SPAC arbitrage and structured equity. These funds bring quantitative sophistication and the operational infrastructure to execute the complex settlement mechanics. They are not making fundamental bets on the target company — they are earning a structured return for providing liquidity and reducing redemption risk. Major participants include funds focused on event-driven, merger arbitrage, and volatility strategies.

Settlement Mechanics

Traditional FPA Settlement

At the closing of the business combination, the FPA investor delivers the committed cash and receives shares (and warrants, if applicable) of the combined company. Settlement is simultaneous with the merger close — the FPA funds flow into the combined company's balance sheet alongside trust proceeds and PIPE capital.

If the business combination does not close (because the SPAC liquidates or the deal is terminated), the FPA terminates without settlement. The FPA investor has no obligation to fund.

OTC FPA Settlement

OTC-structured FPAs settle differently. The settlement typically involves a cash exchange (net of the forward price and the stock's current market value) or physical delivery of shares plus a cash adjustment. The precise mechanics depend on the contract terms, but the general pattern is:

1. At closing: The FPA counterparty holds its shares through the merger. The combined company may make a prepayment to the counterparty.
2. During the post-close period: The FPA remains outstanding. The counterparty may hedge its exposure by selling shares (if registration permits) or through derivatives.
3. At maturity: The forward settles. If the stock price exceeds the forward price, the counterparty profits on the spread. If the stock is below the forward price (or below the reset price, if applicable), the combined company may owe the counterparty a cash payment or additional shares.

The settlement risk in OTC FPAs is borne primarily by the combined company. If the stock declines sharply post-close, the settlement payment to the FPA counterparty can be substantial — effectively transferring wealth from the combined company (and its other shareholders) to the FPA counterparty.

Case Study: Paysafe and FPA Dynamics

PAYO (Paysafe) offers context for understanding FPA dynamics in practice. While Paysafe's SPAC merger (via Foley Trasimene Acquisition Corp II) utilized a combination of trust proceeds and PIPE financing, the deal illustrates the broader category of structural mechanisms sponsors deploy to ensure adequate cash at closing. The Foley-sponsored SPACs were notable for their large sponsor FPA commitments, reflecting Bill Foley's willingness to put personal capital at risk alongside the trust.

The evolution from sponsor-funded FPAs (common in the Foley SPACs) to third-party OTC-structured FPAs (dominant from 2023 onward) marks a fundamental shift in who bears the redemption-backstop risk and on what terms.

Recent Evolution: The Rise of OTC-Structured FPAs

The shift toward OTC-structured FPAs accelerated in 2022-2023 as the traditional PIPE market contracted and redemption rates climbed above 90%. Several factors drove the transition:

PIPE Market Contraction

As institutional investors retreated from SPAC PIPEs — burned by post-merger stock declines in the 2020-2021 vintage — SPACs needed an alternative source of committed capital. OTC-structured FPAs filled this gap because they attracted a different investor base (hedge funds seeking structured returns) and did not require the same fundamental conviction in the target company.

Redemption Severity

With redemption rates routinely exceeding 90%, the amount of capital needed to backstop the trust was enormous relative to what traditional PIPE investors were willing to provide. OTC FPAs, which essentially recycled existing shares rather than requiring new capital investment, were more capital-efficient for the providers.

Sponsor Incentives

For sponsors facing high-redemption environments, OTC FPAs offered a way to close deals that would otherwise fail due to insufficient cash. The cost of the FPA (paid by the combined company in the form of prepayments, discounts, or settlement obligations) was borne by the post-merger entity — not by the sponsor personally.

Regulatory Scrutiny

The SEC has taken note of OTC-structured FPAs. The 2024 SPAC rules require enhanced disclosure of FPA terms, including the economic impact on the combined company and existing shareholders. Some market participants expect further regulatory guidance as the structures continue to evolve.

Risks and Considerations

For the Combined Company

OTC-structured FPAs can impose significant post-close obligations on the combined company. Settlement payments, price resets, and early termination provisions create contingent liabilities that may not be immediately obvious from the merger proxy's summary disclosure. Investors in the combined company should read the FPA agreement (filed as an exhibit) carefully.

For Public Shareholders

FPAs dilute or impose costs on the combined company, which indirectly affects all shareholders. A generous FPA that pays the counterparty $2.00 per share in prepayment and includes a price reset below $8.00 is economically equivalent to the combined company issuing shares at a discount — diluting existing shareholders to attract capital.

For FPA Counterparties

The FPA counterparty bears the risk that the merger does not close (rendering the forward worthless) or that the post-close stock declines beyond the protection afforded by the reset mechanism. OTC FPAs are illiquid positions that are difficult to exit before settlement.

FPAs in the Current Market

As of 2025-2026, OTC-structured FPAs are a standard feature of de-SPAC transactions. Most SPACs completing mergers in this period use some combination of a small PIPE, one or more OTC FPAs, and non-redemption agreements to assemble sufficient cash at closing. The traditional model — a large PIPE from blue-chip institutional investors providing both capital and validation — has given way to a more fragmented capital structure that achieves the same cash outcome through different instruments with different risk profiles.

For practitioners and investors, the key analytical questions when evaluating an FPA are:

1. What is the all-in cost to the combined company? Sum the prepayment, the discount to trust value, and the expected settlement payment under various stock-price scenarios.
2. Who is the counterparty? A sponsor-affiliated FPA signals alignment. A third-party hedge fund FPA signals structural motivation, not fundamental conviction.
3. What are the settlement terms? Does the FPA include a price reset? What is the maturity? Can the counterparty terminate early? What happens if the stock declines 50%?
4. How does the FPA interact with other capital sources? Evaluate the FPA alongside the PIPE, NRAs, and trust proceeds to model the total cash available at closing and the total dilution to post-merger shareholders.
5. Is the FPA disclosed in sufficient detail? Under the 2024 SEC rules, FPA terms must be disclosed in the proxy. Incomplete or vague disclosure is a red flag.

The forward purchase agreement has evolved from a relatively simple sponsor commitment into a sophisticated financial instrument that sits at the intersection of SPAC structuring, OTC derivatives, and capital markets execution. Understanding its mechanics — both the traditional form and the OTC-structured variant — is essential for anyone evaluating de-SPAC transactions in the current market environment.