Are SPACs Dead? Or Just Wounded?
We think the latter. The concept behind Special Purpose Acquisition Companies is sound and, of course, perfectly legal. Taking a “shell” company public in anticipation of it acquiring a private company, thereby avoiding most of the work and related cost of a traditional IPO (including underwriting), has been an approach used in business since 1993. Well over 1,000 SPACs have been listed on major U.S. stock exchanges so far with, interestingly, Continental Stock Transfer & Trust Company handling the vast majority of them as trustee and transfer agent.
While the SPAC concept itself is simple, the actual mechanics of a SPAC forming, managing itself and then merging is more complex than one might think. Proceeds from the SPAC IPO have to be kept in a specialized trust account, and care must be taken in monitoring and, as necessary, enforcing the window of time within which the private company acquisition takes place. The acquisition target has to have a fair market value of at least 80% of the net assets of the shell company, and business combinations inherent in SPACs require shareholder approval. There is, additionally, extensive information about the target business that must be disclosed to SPAC shareholders. And more.
The recent “wounding” of the SPAC industry has come from the SEC, which has proposed new rules that would make SPACs even more challenging, such as….
- Give investors the right to sue the company if projections about future success of the SPAC turned out to be materially untrue.
- Require more disclosure about the parties putting the SPAC deal together, including individuals’ compensation and potential conflicts of interest – along with beefed up financial statements from the private company target.
- Underscore the requirement that assets held by the SPAC before merger with an acquisition target be in low-risk vehicles and/or instruments.
- More aggressively enforce expiration dates on SPAC mergers.
While the new rules are still just in proposal stage (delayed by the glitch at the SEC revealed last fall regarding its receipt of comment letters) the various SPAC industry participants are obliged to anticipate that the proposed new rules will largely come to pass. We should note also that the generally weaker performance of equity markets over the past few years, which by extension reduced the number of all IPOs, has negatively impacted SPACs too.
But again, nothing has happened, or is likely to happen, that we can see which has mortally wounded, or could mortally wound, the SPAC industry. It is still another way to “go public” with valid advantages. Some speed bumps have simply (and temporarily?) been placed in its path. Remember also that SEC Chairs, with their varying pro- and anti-business philosophies, come and go. Bottom line: if there is money to be made in a certain segment of business, and it has any path forward, savvy participants and investors will pursue it with plenty of success.