Tech and life sciences companies seeking to go public often gravitate towards the US capital markets, generally in the hope of higher valuations than in Europe.
An IPO has always been the traditional route to do this but SPACs have recently become an alternative with apparently fewer obstacles. Over 650 SPACs have been launched since the beginning of 2020 raising over $200bn. With 248 US SPACs raising over $80bn in 2020 the market saw an enormous surge compared to 2019 during which only 59 US SPACS raised ca. $14bn. In 2021 this trend continues. Until September 2021 more than 410 US SPACs raised over $120bn, far more than the total achieved in 2020, both in terms of the number of transactions and amount of capital raised.
Whilst this trend has reached Europe (a relatively small number of SPACs have been listed on stock exchanges in Paris, Amsterdam and Frankfurt, and the UK has changed its listing rules to allow for SPACs in August 2021) the vast majority of SPACs have been launched in the U.S.
“SPAC” means special purpose acquisition company (previously also known as “blank-check company”), and describes a shell entity with no operations, created by a financial sponsor for the sole purpose of raising capital on a stock exchange via IPO. The sponsors or founders make capital contributions to the SPAC and receive “units” consisting of stock and favorably priced warrants entitling to acquire further stock (founding or sponsor shares and warrants), as do initial investors, but in the case of investors at a higher price (generally $10 in the US or €10 in the EU). The capital raised by the SPAC is kept on an interest-bearing trust account and is to be deployed through the acquisition of an existing operating company (“Target”) within a specified time frame (usually 2 years).
The acquisition of a Target (a “de-SPAC“ transaction) is implemented through its purchase by, or merger with, the SPAC (or similar transaction), and must be approved by the investors. Following the de-SPAC transaction, the SPAC is the surviving publicly traded entity running the operational business of the Target. If the SPAC fails to allocate its capital within the set time frame, the SPAC has to return its capital to its investors. Also, if the investors do not approve a de-SPAC transaction they have the right to opt-out and have their capital repaid against redemption of their shares. Even if the transaction is approved by the majority of shareholders, dissenting shareholders may also leave the SPAC against a compensation corresponding to their invested capital plus interest.
SPAC transactions were first established during the 1980s and featured during the dotcom period around 2000. They have become more prevalent again in recent years, as a result of a number of different factors – a maturing “SPAC industry”, high availability of funds, but lack of investment opportunities, and most notably the extreme market volatility caused by the global pandemic in 2020 inducing some companies to postpone IPOs, whilst others chose the SPAC route as less risky to go public.
Some European exchanges permit the listing of SPACs although there are few specific SPAC regulations. It is however in the US where the number of SPACs has proliferated. This situation has now created competition among SPACs, exacerbated by the two-year time constraint for the capital deployment. An attractive and well-positioned Target can thus find itself being pursued by multiple SPACs.
certainty of closing
The business combination agreement governing the de-SPAC transaction tends to provide for greater certainty of a successful “closing” as compared to a longer IPO process that depends on a successful roadshow.
certainty of price
Rather than depending upon an IPO roadshow result, the pricing of the de-SPAC transaction will be as agreed between the SPAC and the shareholders of the Target.
selecting the right SPAC sponsor
Growing competition among SPACs allows the Target to select a SPAC sponsor with a strategically “good fit”, providing for:
Value add to the Target and its board;
Alignment of interests between the SPAC and the Target’s management team;
Beneficial association with a sponsor’s strong reputation in the investment community.
(b) From the sponsors’ and investors’ perspectives:
potentially high gains
Sponsors will usually finance the costs of the setting up the SPAC. In return they will get (i) founding or sponsor shares at nominal value of up to 20% of the listed entity following the de-SPAC transaction (the sponsor promote), plus (ii) separately tradeable founding or sponsor warrants which give them further upside if the share price soars.
good investor protection
Investors get an asset similar to private equity, but with improved investor protection mechanisms, plus the additional upside if and when they exercise their warrants.
complexity can impact the real valuation
The SPACs’ complex capital structures – including the dilutive effect of the sponsor “promote” and warrants – can significantly affect the “headline” valuation.
availability of required financial statements
In case of a US SPAC, the Target’s accounts must meet the US Public Company Accounting Oversight Board requirements. This can involve re-auditing of previous financial year accounts, which can take several months depending on the Target’s incumbent accounting and reporting routines.
Consider whether the target is “ready” to be a listed public company
have appropriate corporate governance in place (e.g. board and committee composition);
establish risk management, investor relations and compliance structures;
provide quarterly financial results reporting;
meet applicable auditing standards and have required internal controls in place;
satisfy its stock exchange’s post-admission (e.g. disclosure) obligations for listed companies, and
understand the implications of possibly being a “foreign private issuer” and of an emerging growth company and, whether these are status which should and can be maintained.
Beware of time pressures:
SPACs are often perceived as a short-cut to the IPO process.
However, getting “SPAC-ready” requires similar steps as for a traditional IPO, which can impose time pressures on the Target’s team.
In addition, the Target should be prepared for due diligence by the SPAC as its acquirer, and this due diligence process must keep pace with the progress of SPAC investor negotiations.
Do not underestimate the cost and risks of the deal and of being stock exchange listed:
SPAC transaction costs can be substantial.
Marketing risks also exist in de-SPAC transactions.
Full tax advice on the tax impact of the transaction will be required.
Capital market compliance typically comes at a higher cost in the U.S. than in Europe;
Corporate executives of US listed companies may face increased liability risks compared to European colleagues.
D&O insurance will be required and can be costly.
For any operating company aiming to raise capital and to become publicly listed, the SPAC route is a real alternative. The current market environment is favorable for such operating companies in light of the number of SPACs seeking targets. However, achieving a successful outcome will require careful navigation of the challenges described above.
Authors: Alexander R. Roth M.Jur. Partner @ Taylor Wessing, Silicon Valley
Steven V. Bernard Partner @ Wilson Sonsini Goodrich & Rosati, Palo Alto
Michael C. Labriola Partner @ Wilson Sonsini Goodrich & Rosati, London
Daniel Glazer Partner @ Wilson Sonsini Goodrich & Rosati, London
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