About SPACs

Special Purpose Acquisition Companies, or SPACs, are blank check companies formed for the purpose of entering into a merger, share exchange other similar business combination with one or more businesses or entities.    In effect, they are an alternative to a traditional IPO.  While SPACs were developed in 1993, they did not become mainstream until their resurgence nearly 10 years later.  In 2020, SPAC IPOs have raised over $60 billion and represent a significant portion of the US IPO market.  Some of the more prominent companies to list via a SPAC include Hostess Brands, DraftKings, Virgin Galactic and Nikola Corporation.    

SPACs complete their initial public offerings by issuing units to the public.  These units, which are typically priced at $10.00 each, consist of one share of common stock and a derivative security like a warrant or right.  All of the IPO proceeds are placed in a trust account for the benefit of the common shareholders.  The shareholders are effectively guaranteed a return of their initial capital at the time of a business combination or the liquidation of the company.  SPACs are finite life entities and must complete a business combination by a prespecified date, which is usually 18 to 24 months from the time of the IPO.   Following the completion of its initial business combination, the SPAC changes its name to that of its merger partner and the stock begins trading under its new ticker symbol.   

Following the identification of a suitable business combination partner, the SPAC management team will conduct detailed due diligence and negotiate the structure of the transaction with the target.  The transaction consideration typically includes a significant amount of equity, but could also include cash, notes and/or contingent consideration.  The cash in the SPAC can be used to fund the purchase price or remain in the company for use in the business (or some combination of the two).  The SPAC can also raise additional capital via debt, preferred stock or a private placement (PIPE) in order to fund the transaction. PIPEs are also used to ensure that proceeds are available to complete the transaction and provide the market with a positive signal.  Once the transaction is negotiated and the financing is in place, the transaction is announced to the market and the parties work together to obtain shareholder support for the transaction.  The SPAC is obliged to hold a shareholder vote on the transaction and must obtain the approval of at least 50% of its common shareholders.  All public shareholders are permitted to vote on the transaction and separately declare if they would like to keep their shares or redeem them for a pro rata portion of the cash in the SPACs trust account.  Upon the approval of the merger and the attainment of all required closing conditions, the transaction closes and the target company becomes the remaining public company.  If the transaction is not approved or closing conditions are not met, the SPAC may be forced to find an alternative transaction or liquidate and return the cash in trust to its common shareholders.  

SPACs have grown significantly in popularity with companies contemplating a traditional Initial Public Offering because they provide a number of advantages:

• Sellers know the transaction consideration at the beginning of the process rather than at the end (day before listing)
• Expedited public listing with lower transaction costs
• Potential closing of the “IPO Window” is not an issue since the SPAC is already public
• Flexible deal structure– SPACs have the ability to use cash, debt, common stock, preferred stock, contingent consideration, or any combination of these to structure a transaction that works for all parties
• SPACs can provide forward guidance to the market, which could help to maximize the return to the target's shareholders

While there are numerous advantages of a SPAC, there are disadvantages/risks that should be contemplated by target companies:

• The transaction requires shareholder approval, so there is a risk that the transaction will not close
• Proceeds remaining in the trust account may be less than anticipated, which could impact the cash proceeds to the sellers or decrease the cash flowing to the target's balance sheet
• The dilution in the SPAC structure could be impactful if the appropriately sized SPAC is not selected