SPACs: Should Your Company Use One to Go Public?

The year 2020 has been a record-setting year for special purpose acquisition companies (SPACs), also referred to as blank-check companies. SPAC IPOs have raised more than $62 billion in 169 IPOs so far this year.

SPACs are not a new concept. In fact, the concept has been around since the 1980s and SPACs have existed in their current form since 2003. The recent popularity of SPAC IPOs is partly attributable to high levels of liquidity. Investors also have shown interest in rapidly growing companies.

The so-called SPAC craze started to take hold in the summer of 2020. At that time, billionaire hedge fund manager Bill Ackman debuted Pershing Square Tontine. That SPACis the largest ever blank-check company with at least $5 billion in cash equity capital it can draw upon. Pershing Square Tontine announced that it planned to acquire a mature unicorn. It initially approached Airbnb confidentially before filing for its SPAC IPO. Airbnb ultimately declined the acquisition. Instead, it is preparing for a traditional IPO.

The mechanics of SPACs has made them a popular choice for going public this year. These are some of their key characteristics.

Founders and Sponsors of SPACs

SPACs Form S-1 SEC
SPACs Form S-1 SEC

The SPAC management team usually determines an acquisition target at a time well after the SPAC IPO date. Thus, investors are highly reliant on the business acumen of the SPAC management team. The team must do proper due diligence on the private company target. When the SPAC raises funds, investors are merely getting a best efforts agreement from the SPAC management team. SEC rules requires disclosure in the registration statement that the SPAC does not have an acquisition target under consideration prior to the SPCA IPO closing. Moreover, disclosure is required that the SPAC’s directors and officers have not held discussions with underwriters or other advisors regarding potential business combinations.

IPO Registration Process

SPACs Use Trust Accounts

Public Units, Public Shares, and Warrants

The warrants become exercisable after a certain number of days following the successful completion of the business combination. Participants also referred to this as the De-SPAC transaction. This time period is usually 30 days after the De-SPAC transaction. At this time, the Class A shares and the warrants become decoupled and start trading separately on the securities exchange. The warrants have a set strike price in excess of the IPO price. The strike price for the warrants is usually set at $11.50, or 15% above the $10.00 per unit IPO price.

Founder Shares in SPACs

The Acquisition Target

De-SPAC Process

Many of the same SEC rules on disclosure requirements that apply in a traditional IPO also apply during the De-SPAC process. In a traditional IPO, public companies must file a Form 8-K with the SEC within four business days of a major event. This serves as notice to investors of the major event. Similarly, SPACs are required to file a special Form 8-K, known as a “Super 8-K” within four business days of completing a De-SPAC transaction. The Super 8-K requires disclosure of audited financial statements and information on the people acquiring control.

Forward Purchase Agreement

Private Investment in Public Equity (“PIPE”) Commitments

SPAC Returns

Notable SPACs of 2020

Additional SPACs in 2020 include the Nikola merger with a SPAC called VectoIQ Acquisition. The DraftKings merger with a SPAC called Diamond Eagle Acquisition Corp. also occurred. Even former U.S. House Speaker Paul Ryan has participated in the 2020 SPAC craze. He backed a blank-check company that raised over $300 million in a SPAC IPO.

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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