Over the past several months, companies have increasingly chosen to go public via the special purpose acquisition company — or SPAC — route. Some, like Nikola Corporation and Virgin Galactic Holdings, have performed well early on. Just as with IPOs, however, many will fail.

As an investor, it’s important to consider how SPACs work, what characteristics to look for in a SPAC, and if this type of public company can be a sound investment. Let’s explore.

What is a SPAC?

A SPAC is a publicly traded alternative to an IPO. Unlike an IPO, a SPAC merely goes public with a chunk of cash to purchase a company. It has a set amount of time to do so, with the funds being returned to shareholders if the time period expires with no deal made.

A SPAC will often focus on a specific industry or region. Even when it does, however, the company is still authorized to explore merger targets of any industry. There is no guarantee you will like what it chooses to buy. While Diamond Peak Holdings debuted in markets as a real estate SPAC, this week it announced electric car company Lordstown Motors as its merger decision.