Unless you have been avoiding financial news and market analysts during 2020 and 2021, you have heard discussions regarding Special Purpose Acquisition Company(ies) (“SPACs”). SPACs have been around for decades, but their use has recently skyrocketed as companies consider alternative exit strategies during the Covid-19 pandemic, as it created uncertainty on the public and Initial Public Offering (“IPO”) market. In fact, during the first 9 months of 2020, SPACs in the United States increased $41.7B; equating to 44% of all of the public offerings. In the first two (2) months of 2021, SPACs accounted for more than 20% of the overall deal making activity.[1] But do you know what a SPAC is and why it has become so popular?
The SPAC Lifecycle
In layman’s terms, a SPAC is a “blank check”[2] shell[3] business company, formed to raise capital through an IPO with the intention to later acquire, merge or be acquired by a private company with an operating business. In other words, a SPAC provides a means for a private company to go public and raise capital as an alternative to an IPO. In a traditional IPO a private company goes public by selling shares on the market; in a SPAC transaction, a private company goes public by merging with an already public SPAC.
First, the SPAC corporation is formed by a group of individuals, often well-known and established investors, private equity firms and/or venture capitalists and their professionals. Generally, these founders for the corporations issue themselves approximately 20% of the shares while reserving the remaining shares to be held by the public shareholders.
Second, the SPAC proceeds through the IPO process by filing a Form S-1 Registration Statement with the Securities and Exchange Commission (“SEC”). The S-1 Registration Statement will register “Units” comprised generally of one (1) share of common stock and a fraction of a warrant to purchase shares of common stock (usually, 1/2 or 1/3). Generally, the shares issued to the founders and the shares offered publicly will have similar voting rights, with the exception that the founders will usually have the sole right to elect members to the SPAC’s Board of Directors. One additional key difference between a traditional IPO process with an operating business and the SPAC IPO is that the SPAC IPO is much faster and can be completed in as little as eight (8) weeks without much of the financial reporting, due diligence and disclosure involved in a traditional IPO.
After effectiveness, the SPAC then submits a Form 211 with the Financial Industry Regulatory Authority (“FINRA”), and once processed, the SPAC obtains a ticker symbol under which its shares may be traded. A key distinction about a SPAC is that unlike other companies, the SPAC is a shell company when it becomes public. The first round of investors will purchase shares of the SPAC and most of the funds invested will be held in an escrow account where it will be held until acquisition targets are identified.
Once a SPAC has identified an initial business combination opportunity, its management negotiates with the operating company and if approved by the SPAC shareholders, the acquisition is consummated, usually as a reverse merger. The merger will require shareholder approval either through an actual shareholder meeting or a proxy statement. Management has two (2) years from the initial fund raise to complete the acquisition or the funds are required to be returned to the investors. This feature is enticing for investors, and is slightly less risky than traditional IPOs – for if the acquisition doesn’t materialize or close, the investors get their money back.
After completion of the reverse merger and filing the Form 8-K with the SEC announcing the closing, the operating company is publicly traded and is now required to comply with all the applicable SEC and FINRA regulatory and compliance requirements. These include filing the Form 10-K on an annual basis, Form 10-Q on a quarterly basis, Form 8-K for any interim announcements, complying with Section 16(a) reports, and any other filings required to ensure compliance with the SEC.
Successful SPACs
While rising in popularity, not all SPACs have been successful. Sometimes the stock price can drop quickly after closing, often at a loss to investors. However, the following are some of the recent successful SPACS:
- Opendoor Technologies (NASDAQ:OPEN)
- Skillz (NASDAQ: SKLZ)
- Open Lending (NASDAQ:LPRO)
- Adapthealth (NASDAQ:AHCO)
Many factors go into making a SPAC successful including the quality of the founders, sponsors, management and their professionals; deal structure; the financial health of the operating company; the health of the industry of the operating company; and investor interest in the operating company. The most successful alternative deal structures propose better alignment of the founder’s goals and the investors’ objectives.
Notably, as of March 12, 2021, over 82% of the 478 SPAC deals in 2020 and 2021 [4]remain uncompleted and have yet to identify a target operating company. That leaves over $146 billion in investor funds tied up in uncompleted SPAC deals, with more capital being raised every week.[5]
Conclusion
Ultimately, the process of merging with an already public SPAC, results in the shares of the private company that merged with the SPAC to be publicly traded in a faster, more efficient and sometimes easier route than a traditional IPO. SPACs listed on major exchanges allow for investors to invest easily through their online brokerage accounts. Early investors like that some risk is mitigated as the failure to achieve the acquisition results in the return of their investments, rather than the loss.
However, SPACs aren’t without any risks. To more fully understand the inherent risk of SPAC deals, see the SEC’s Office of Investor Education and Advocacy Updated Investor Bulletin, “What You Need to Know About SPACs” from May 25, 2021. . If you are interested in forming, investing in, gaining assistance with the required periodic filings or simply learning more about SPACs, please contact the attorneys at Jacko Law Group, PC.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://jackolg.com/.
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[1]https://www.ft.com/content/abcf1dad-833d-4620-ab57-96ea01d918ed
[2] A development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person.
[3] A legal entity that does not possess actual, non cash assets or actual business operations.
[4] https://www.sia-partners.com/en/news-and-publications/from-our-experts/spacs-which-factors-lead-merger-success
[5] https://www.spacresearch.com/symbol?announced-merger=all
