The SPAC is back
With all the recent media coverage, you might think that SPACs (special purpose acquisition companies) are new to the investment community. But, in fact, they have been around in slightly varying forms since the 1990s. So then, what are SPACs and what accounts for their recent popularity and resurgence?
A SPAC (also known colloquially as a “blank check company”) is a shell corporation that is listed on a public stock exchange and set up by investors for the sole purpose of raising funds to acquire a private company. A SPAC enables the private company to list and trade publicly without going through the more expensive and time-consuming initial public offering (IPO) process. SPACs in the US must be registered with the U.S. Securities and Exchange Commission (SEC), which notes that a SPAC “is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified.”
So when a SPAC raises money, the investors into the SPAC typically do not know what the acquisition company will be. To raise funds with this uncertainty, SPACs are usually formed and led by experienced management teams working in private equity or hedge funds. The SPAC managers hold the funds in a trust account until closing and usually receive 20% of SPAC common shares at that time. Once a target business is identified, SPAC management must make full disclosure to shareholders, including audited financials and terms of the merger or acquisition, to enable them to make an informed decision whether to approve.
The target company must have a fair market value at least equal to 80% of the SPAC’s net assets at the time of merger or acquisition. If a target business is not identified within the stipulated timeframe of the SPAC (often about two years), unless the SPAC shareholders agree to extend the deadline, then the SPAC must dissolve and return the assets to the shareholders. If an acquisition or merger is completed, then the SPAC shareholders can swap their shares for shares of the combined company, or they can choose to redeem their SPAC shares and get back their original investment plus interest.
Despite the global pandemic, almost 250 SPACs went public last year and raised close to $84 million. Among the target companies that went public in 2020 are several electric vehicle (EV) start-ups, such as Fisker Inc., Nikola Corp., and Lordstown Motors. Although investor interest in these companies was high prior to and at closing, particularly in light of strong financial projections, most of these companies have yet to bring a single saleable EV to market and have struggled to maintain investor interest amid plummeting share prices. And at least three SPAC-backed EV companies are the subjects of SEC inquiries.
Despite increased scrutiny by the SEC and fewer SPACS closing in the second quarter of 2021 than in 2020, the SPAC trend continues to elicit investor interest. Among the companies that have either gone public or announced plans to go public in 2021 via SPACs are several life science companies. Last month, DNA home-testing company 23andMe went public via a SPAC sponsored by Richard Branson. And several digital media companies, such as BuzzFeed, Vice Media, and Bustle Media, are rumored to be considering SPACs to bring in additional investment.
SPACs also have received a boost in public interest arising from celebrity support and sponsorship by the likes of rapper Jay-Z, NBA star Shaquille O’Neal, and others. Further, EV companies are not the only trendy transport companies to merge recently via SPACs. Astra Space Inc., a company that launches satellites and small vehicles into space, began trading on NASDAQ on July 1 after completing its SPAC merger, which raised nearly $500 million to scale its business and enable further development. Even the traditionally more cautious European capital markets are now expressing greater interest in US SPACs.
As noted by those who cover investment markets, one reason that SPACs may be regaining popularity is the issue of warrants. SPAC warrants provide investors with the opportunity to purchase additional shares of the newly combined entity at a discounted price after the acquisition or merger has been completed. Investors increasingly are leveraging the risks associated with SPACs to obtain more warrants at a discount and thereby strike a better deal for themselves. For this and other reasons, as one entrepreneur investor recently stated, “It’s a dynamic market, very hot and SPACs are coming back.”
Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.
