Special Purpose Acquisition Companies are publicly traded companies set up to acquire private corporations for the purpose of allowing them to public without all the bother, not to mention oversight, involved in setting up an IPO. At least this is what I’ve understood from the papers. What I don’t understand is how the SPAC itself was allowed to become a public company without undergoing such scrutiny with the possibility of being forbidden on the grounds that their only purpose is to circumvent the law about IPOs.
The point of the laws governing disclosure for private companies going public is that public investors deserve a fair and true picture of the company that they’re buying.
An existing private company that goes public likely has all sorts of complicated assets and liabilities and potential risks, and so providing information on that to potential public investors is a lot of bother.
A SPAC, on the other hand, is very simple. It’s just a pot of money with a board of directors and a mission to go find some company to buy. The amount of disclosure required for such a thing is pretty limited. There aren’t any complicated existing structures to advise investors of. So the process is simple.
The risks are also pretty low. An investor in a SPAC has the option to withdraw their money (redeem shares for $) at the time a potential deal is announced. And at that time, the market will bid the price of the SPAC up or down, so investors have way more information about the value of the potential deal than investors in an IPO typically have.
In my opinion, SPACs are justifiably not required to endure some of the onerous process of taking a private company public; they are simpler and less risky than investing in an IPO and thus do not require as much oversight and disclosure.
In my limited experience, they find a company that is technically public (perhaps on the penny stocks exchange) but does little to no business.
SPAC come and go in favor. They have been around for decades. They are popular again for the past six months or so, as there is still quite a bit of cash/capital globally looking for a place to earn returns. It’s not that they are attempting to circumvent disclosure rules, because once they do make an acquisition, all of the normal disclosures of any public entity are now applied to the newly combined entity.
SPACs also have a limited amount of time (18-24 months) to find investments or they are liquidated and the capital returned less any expenses incurred by the Company to the shareholders.
@iamthewalrus_3’s description is pretty good. There is a bulletin about SPACs from the Office of Investor Education and Advocacy at the SEC that I think is very accurate and pretty clear for regular people to read.
I’m going to quibble with @iamthewalrus a bit though.
Investors have the option to withdraw the portion of the SPAC’s assets attributable to the investors’ shares. Unfortunately, that can be a significantly less than the investors paid for those shares. The sponsors of the SPAC retain a portion of the SPAC company that doesn’t reflect the amount of their capital contribution. In this offering of Nabors Energy Transition Corp., for example, the sponsors will retain 20% of the company even though they put in a de minimis amount of capital. Other investors will contribute essentially all the money, and if they all later decide they don’t want to go ahead with the deal, they will be entitled to only 80% of the SPAC’s trust assets. So they will take a roughly 20% haircut. The trust will also have expenses (like 5.5% in underwriting fees for the initial offering), reducing the amount available in the trust for redeeming investors by even more. The trust assets can continue to decline as the SPAC incurs its own operating expenses.
Worse yet, if you buy into the SPAC in the secondary market, you might have paid a premium for the shares over the IPO value but you would still be entitled to a redemption of only the pro rata portion of the trust assets, which could be much less.
The real risk of a SPAC is that the sponsors will pursue a lousy deal. The sponsors really want a deal to happen because that is how they make the most money, even if the deal is suboptimal for investors. The SPAC board might overvalue the interests that they will acquire in any deal
The market price is valuable information but if it is not informed by good disclosure about the transaction, it’s not as meaningful as it would ordinarily be.
Quibble graciously accepted. I’m not an expert; I just read a lot of Matt Levine columns.
SPACs must provide audited financials prior to their IPO. Granted, this is basically a pretty simple audit verifying they have their ducks in a row financially. There’s also the normal stuff like D&O insurance, listing fees, various legal fees, etc. that must be taken care of prior to the IPO. The largest fee is the upfront underwriting fee, which is typically 2% of the total capital raised. Upfront costs altogether are usually about 3% of the total capital raise. So, for example, a $200mm SPAC will require the sponsors (people running the SPAC) to come up with about $6mm of “at-risk” capital prior to IPO.
This is not quite true. When SPACs announce a business combination with a target company they must file a registration statement for the transaction with the SEC. This document must contain all the things a “regular way” IPO registration statement contains - financial statements, risk factors, etc. One difference is that SPACs (or arguably the target companies) have been able to provide “forward looking projections” in their registration statements and provide a forecast of future financial results. This safe harbor provision is under scrutiny now.
This is not at all correct. The capital of SPAC IPO buyers is 100% backed by cash in trust.
Here’s how the money works in a $100mm SPAC IPO:
The sponsor is required to pay for all of the upfront costs of setting up the vehicle - banking fees, lawyers, listing fees, insurance, etc. This generally amounts to 3% of the total capital raised. To fund this, the sponsor will typically purchase warrants - in this example 3mm warrants for $1.00 each. The proceeds from these “private placement” warrants go towards paying both upfront expenses and funding the working capital of the SPAC.
On the public offering side, 10mm units are sold raising $100mm, which is placed in trust (and begins to earn interest).
Fast forward 18 months or so, and the SPAC will present a proposed business combination to its shareholders. Shareholders have the option to redeem their shares for the $10 in trust (plus any interest earned) if they don’t like the deal or remain a shareholder in the NewCo.
The 80%/20% thing is a separate issue. SPAC sponsors are granted 20% of the outstanding shares of the SPAC, which is called the “promote.” These shares have no claim on the cash in the trust account, and only are worth anything if they can get a deal done. The outstanding shares of the $100mm SPAC are as follows:
Public SPAC shares: 10mm
Sponsor promote shares: 2.5mm
These promote shares are typically locked up and/or subject to forfeiture/earnout thresholds as negotiated at the time of the business combination. It varies from deal to deal, but usually the sponsor entity ends up with a low single digit percentage of ownership in the NewCo.