A forward purchase agreement (FPA) is a type of agreement that is commonly used in the context of Special Purpose Acquisition Companies (SPACs).

SPACs are companies that are formed for the purpose of acquiring or merging with another company. Investors typically buy shares in the SPAC during its initial public offering (IPO), and the funds are held in escrow until a suitable target company is identified.

When a SPAC announces its intention to merge with a target company, it often enters into an FPA with one or more investors. The FPA is a contract that allows the investor to purchase a certain number of shares in the post-merger company at a predetermined price.

The advantage of an FPA for investors is that it allows them to secure a certain number of shares in the target company at a fixed price before the merger is completed. This can be especially valuable if the post-merger company is expected to have significant growth potential, as the investor can potentially profit from the increase in the company`s share price.

For the SPAC, the FPA can help to provide additional funding and support for the merger. It can also help to demonstrate investor confidence in the post-merger company, which can be beneficial for its long-term success.

It`s important to note that there are some risks associated with FPAs. If the post-merger company doesn`t perform as expected, the investor may end up losing money on their investment. Additionally, the terms of the FPA may limit the investor`s ability to sell the shares they`ve purchased, which can make it difficult for them to exit the investment if they need to.

Overall, FPAs can be a useful tool for investors and SPACs alike. However, it`s important for investors to carefully consider the potential risks and rewards before entering into an FPA, and to ensure that the terms of the agreement are fair and reasonable. As with any investment, thorough research and due diligence are essential for success.