Although SPACS (Special Purpose Acquisition Companies) are becoming more popular thanks to the flexibility they give to companies that want to go public, there’s still some confusion as to what a SPAC is and does, and how they are of benefit.

To help you negotiate the minefield of information that’s available, WGP Global have produced this handy guide so that you can be fully informed on all aspects of why and how a SPAC may be the ideal vehicle for your business.

Be aware too, that in 2021 alone, SPACs are expected to account for 50% of the IPO market.

Here is WGP Global’s guide to everything you thought you knew about SPAC’s… but didn’t.

What is a SPAC?

Although SPACs have been known about for some time, what exactly they are has caused confusion for many. Simply put, the SPAC is formed in order to raise capital through an IPO (Initial public offering), and this is done without the business having any commercial operations whatsoever.

The risk of investing is clear, but the returns are normally worth the initial outlay. However, there are situations where an entire investment can be lost. This would normally only happen when – after a SPAC has raised it’s finance but in the two years post-raise – it has been unable to acquire an existing privately held company.

A SPAC is an alternative to a direct listing or an IPO. Such transactions often happen by way of a reverse merger, and this can see the existing stockholders (of the target company) becoming the majority owners of the new entity.

So, what are some of the risks associated with SPACs?

It’s important to note that a SPAC isn’t for everyone, because of the significant risk involved. For example, there can be certain performance issues – ie if reports haven’t been filed – which will adversely affect the stock price.

In the two years (in some cases longer) that a SPAC has to find a business to acquire, investor monies are locked in for that entire period. The opportunity of maximising any investment is clearly therefore lost for that length of time.

Various cases to date have also shown that there remains a risk of litigation. Olivera v. Quartet Merger Corp (SPAC shareholder suing SPAC for failure to honour his redemption right) is one for investors to take a look at, whilst Rufford v. Transtech Serv. Partners, Inc. (challenge to fees being paid to SPAC sponsor) is another. Furthermore, if event projections are missed, this is a further situation that could lead to litigation.

One of the things to find out early on in the process is whether a target company is ‘public company ready’ or not, and this can be seen purely on the basis of how they’ve done things in the past. If they’re not able to pass muster on various internal issues, that should ring the alarm bells.

One of the biggest risks is if the target company negotiates a deal with a SPAC, but then the shareholders of the SPAC decide not to approve the terms. It wastes time and money and isn’t a good look.

Examples of high-profile SPACs

Across the globe there have been a number of examples of high-profile SPACs being executed. A former advisor to President Trump, Gary Cohn, raised $828m via Cohn Robbins Holdings Corp., whilst ex-basketball star, Shaquille O’Neal, paired up with former Disney executives and Martin Luther King III to raise $250m via Forest Road Acquisition Corp. One of the biggest SPACs to date was  Bill Ackman’s raising of $4 billion through Pershing Square Tontine Holdings.

Why are SPACs so popular right now?

Although traditional IPOs haven’t been replaced, SPACs generally give more efficiency and flexibility, and that’s attractive to investors. It’s not unusual to find that public market valuations will exceed private market valuations either.

When there has been market volatility and instability, SPACs have still been able to be taken to a public listing, and what’s more they do allow companies to go public quicker than the usual IPO process.

It’s worth pondering too that the more visible SPACs become, the more investors are getting involved or being receptive to the idea, something that hasn’t always been the case until recently. Valuations are more certain too, thanks to usually being fixed through privately negotiated transactions.

There are a number of other benefits, too many to list here in fact, but WGP Global’s team of experts will be more than happy to speak with you if you are considering what a SPAC could do for you.

How are SPAC sponsors incentivised?

One area that remains confusing for many is how a sponsor of the SPAC will be incentivised. Particularly when you consider that if a sponsor funds the SPACs operating needs in return for shares but then the transaction doesn’t take place, the investment (‘at risk capital’) is lost.

In the most usual type of SPAC, the sponsor will buy founder shares which will eventually be converted into public shares upon successful completion of a listing.

How is an initial SPAC IPO structured?

As there are no detailed financial statements from a SPAC at the registration stage, the statement which the sponsor would file at this point is straightforward – when compared to a traditional IPO.

All agreements (ancillary, underwriting, trust agreement etc) must be agreed before the pitches to investors. Unlike a traditional pitch, the management team trying to sell the SPAC will concentrate on pushing their own experience and expertise forward, rather than tying the fund raising to a more specific business operation.

In general, one share as well as a fractional warrant for common stock is typical of what is usually offered by a SPAC. (Warrants trade separately from the common stock and are therefore quite enticing for the investor).

If the round of fund raising is successful, the sponsor will then decide which company to acquire, with the capital having been placed in trust until such time as it is required.

Any additional funds that may be required are normally raised through further investment and by a vehicle known as a PIPE (private investment in public equity).

What are the key legal issues that arise in SPACs?

It’s worth the time potential investors want to take at the outset to look into any potential legal issues surrounding SPACs. Listing requirements and corporate governance are critical elements of a deal, so it’s vital that all areas are explored thoroughly.

A SPAC will have to file a proxy statement with the target company, and this requires shareholder approval. The SPAC also must comply with securities laws regarding the filing of the proxy statement.

If there is to be a PIPE (private investment in public equity) vehicle, this has to be documented carefully, setting out obligations and rights clearly. The same applies to key contracts and director and officer protections, with a SPAC needing to obtain insurance coverage for the latter.

Projections of the target business must be prepared, and any listing requirements from the relevant stock exchange must be adhered to of course.

How do SPACs target companies to acquire?

The process for acquiring a target company is much the same for any SPAC, once they have successfully completed their IPO. This then gives the sponsor licence to look for the right fit, and there are various criteria they’ll use when looking at which companies to target.

A few years financial records must be included on any proxy statement, with SPACs generally looking towards businesses who can provide a large market opportunity, have a high quality management team already in place and who are ready for the demands placed upon them as a public company.

Fintech’s, software companies, emerging growth companies or those in the media industry are often ripe for the picking.

What are the key negotiating issues between a SPAC and a target company?

Negotiations between a SPAC and a target company are much like any other business negotiation. Often fraught, they must be bullet-proof by the conclusion, however much of a minefield it is to get there.

SPAC shareholders must approve the target company valuation, particularly given that they may also choose to redeem which would lower the valuation significantly.

Are management and employees going to be incentivised, and if so, what does this look like? Perhaps stock options or a new equity plan is a good bargaining chip for SPACs.

Financial statements, key contracts, liabilities, sponsor equity and the like must all be negotiated and agreed upon at the outset by both the SPAC and the target company. It’s not unheard of for a SPAC sponsor to review its percentage or entice the target company by giving up part of their equity interest for example.

If there’s any shortfall in the deal, there must be the facility in place at the outset for either the sponsor or a PIPE to cover it. Similarly, if shareholder approval isn’t obtained, the SPAC or sponsor need to have agreed who will reimburse the target company.

What happens after the SPAC enters into an agreement with a target company?

Once a definitive acquisition agreement has been entered into with a target company, there are a number of hoops to jump through before listing on the Stock Exchange will take place.

The first thing that a SPAC must do is file the various statements with the appropriate body and wait for approval. Once this has been received, only then would they take a vote from their shareholders regarding their approval of the transaction.

The SPAC can of course be turned down at this stage, and shareholders will require their stock to be redeemed, should they be opposed to any deal. (NB:- A SPAC shareholder can still redeem their shares even if they approve the deal).

If the deal is approved, the merger goes ahead and the SPAC will then change with the name being reflected by the acquired company. Thereafter, the SPAC can begin trading on an exchange.

Regardless of your business size and complexity, WGP Global provide our clients with solid business advice and connection with the right and proper types of capital, combined with 40+ years of professional experience and an international business network. You can rely on us to deliver. Get in touch with us at hello@wgp.global.

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