SPACs have made a comeback in the equity capital market in recent years, particularly in 2020 where the global economy is adversely affected by the COVID-19 pandemic. What are SPACs, what do they do and why are they becoming so popular? Part I of this article will discuss the history and characteristics of SPAC, where and how they get listed. Part II will focus more on what investors get from investing in SPACs and what SPACs do with the money raised. 

History and characteristics of SPAC

SPAC, also known as Special Purpose Acquisition Company, is a company established solely for the purpose of raising capital through IPOs. SPAC is not a newly developed vehicle or concept, it has been around for some decades and there have been ups and downs for SPACs. Recently, there has been an increase in the number of SPAC IPOs. Total funds raised jumped from approximately US$3.5 billion through 13 SPAC IPOs in 2016 to approximately US$13.6 billion through 59 SPAC IPOs in 2019 and so far in 2020, there has been 178 SPAC IPOs raising a total of approximately US$64.8 billion¹. The average SPAC IPO size also increased from less than US$250 million to approximately US$370 million in 2020. The SPACs and SPAC IPOs referred to in this article generally refer to those in the US market.

The main difference between a SPAC and other companies that raise funds through IPOs is that SPACs have no commercial operations at the time of listing. There is only one purpose of the listing of a SPAC and that is to raise funding for its business combination, merger with or acquisition of other private operating companies post-IPO such that the private operating company would be able to achieve a listing status without the need to go through the traditional lengthy IPO process. The post-IPO acquisition of or business combination with the private business by a SPAC is generally known as the “de-SPAC transaction”.

SPACs have always been viewed as an alternate route for private operating companies which otherwise may not satisfy listing requirements or find the traditional IPO route too costly and time consuming to go public. SPAC acquires private companies with funds raised from its IPO to achieve this. SPACs offer investors a chance to invest in a fund which are then used to acquire one or more target businesses after the SPAC IPO. The target businesses are usually not identified prior to the IPO to avoid extensive disclosures during the listing process and generally there is a statement in the IPO prospectus specifically to inform investors that there is no identified business combination, acquisition or merger targets nor substantive discussion with any potential target has been initiated. This is why SPACs are also referred to as “blank check companies”, since investors in the IPO do not know which company will ultimately receive their money. 

Where can SPACs go for an IPO? 

The United States stock exchanges such as New York Stock Exchange and NASDAQ have been the popular choice for SPAC IPOs. Certain stock exchanges in the UK (London Stock Exchange) and Europe (Euronext Paris, Euronext Amsterdam) also welcome listing by SPACs but the number of IPOs are not comparable with that in the US. In Asia, several countries accept listing of SPACs, including Malaysia, Singapore and South Korea. The number of IPOs and the capital raised in these Asian countries are not comparable with that in the United States. While the timeframe for US listed SPACs to complete the subsequent merger is 18-24 months, SPACs listed in Malaysia and South Korea are generally allowed up to 36 months after the IPO to complete the merger. 

What are the criteria for a SPAC to get listed and the structure of the listing? 

A SPAC IPO in the US will typically consist of “units” where each unit usually consists of a share of common stock and a fraction of a warrant to acquire a share of common stock in the SPAC. The warrant is normally exercisable after the de-SPAC transaction. The sponsor of SPAC will typically retain around 20% of the shares in the SPAC known as “founder shares” at a nominal consideration. This allows the sponsor to achieve a fairly high return regardless of the value of the SPAC. However, there is a major change in the investment structure of a recent SPAC IPO in the US, where the sponsor does not acquire any founder shares at nominal consideration but rather acquire sponsor warrants which are not exercisable until a certain period of time after completion of the de-SPAC transaction at the fair market value. This arrangement substantially reduced the dilution effect on the investors’ interests which makes the investment more attractive to investors when compared with investing in traditional SPACs² .

There are generally a few criteria built into the structure to protect public investors including:

1. a deadline for SPACs to conclude its first business combination or acquisition, typically within 18 to 24 months (maybe extendable);
2. a right for investors to approve the proposed target business and/or a right for investors to have their shares redeemed by SPACs;
3. a requirement for the IPO proceeds to be held in a segregated trust account; and 
4. minimum deal value requirements (e.g. where the SPACs is listed on the NYSE, the fair market value of the target company(ies) must equal at least 80% of the SPACs’ assets in the trust account at the time of signing the definitive agreement of business combination/merger/acquisition.)

Disclaimer: Nothing in this article is meant to be or shall be construed as any legal advice on Hong Kong, US or the laws of any other jurisdictions referred to in this article or as any legal advice on SPACs to any person.   

^{1 SPAC Statistics by SPAC Insider
2 Prospectus of Pershing Square Tontine Holdings, Ltd.}

In Part I of this article, we have examined the history of SPACs, let’s now turn to examine what investors get from investing in a SPAC, what SPACs do with the money raised and what the future looks for SPACs.

What are investors investing in and what do they get?

In a typical SPAC IPO, the SPAC is a newly incorporated company and does not have any operating history, financials nor performance record. What do investors base their investment decisions on then? In traditional IPOs, the listing vehicle will have operating history and a particular operating business, whether or not the company has been operating in profit in the past is not necessarily a key criterion depending on where the company proposes to list its shares. The company will need to disclose in the prospectus matters such as its business, financial performance, risks involved so that potential investors will be able to have an understanding of how good or bad the company has been performing and assess its future prospects before making an investment decision. 

For a SPAC, no such information is available to investors as the SPAC is only a shell company. What they have, on the other hand, is a management team and an investment team typically with experiences in specific industries or sectors which the SPAC intends to acquire potential targets with capital raised from the IPO. Further, in a SPAC prospectus, there is no information on any potential targets of business combination or acquisition because stating the potential target would mean information on the target will be required to be disclosed as in any traditional IPO of companies with operating history. Hence, what investors invest in is not any specific operating company but rather their trust and confidence in the management team and investment team of the SPAC and their experiences in finding a most suitable target for business combination, merger or acquisition and bring it public.  

In return for their investment, investors receive units of the SPACs, with each unit comprising a share of common stock and a fraction of a warrant to purchase a share of common stock after completion of the de-SPAC transaction. Shareholders are generally given the right to approve or reject any proposed de-SPAC transaction. The SPAC will provide its shareholders with the opportunity to redeem their shares upon the completion of the de-SPAC transaction either (i) in a shareholder meeting called to approve the proposed de-SPAC transaction or (ii) by means of a tender offer. Whether the SPAC will seek shareholders’ approval of a proposed de-SPAC transaction or conduct a tender offer will be made by the SPAC at its sole discretion taking into account factors such as the timing of the transaction and whether the terms of the transaction would require the SPAC to seek shareholders’ approval by law or pursuant to regulatory requirements. Upon a de-SPAC transaction, shareholders can choose to maintain their investment in the newly acquired or merged company or redeem their shares.

What do SPACs do with all the moneys raised?

The capital raised by SPACs through IPOs are held in a trust. Usually, after setting aside some portions of the funds to meet the listing expenses, underwriting commission and the SPACs’ ongoing operational costs, the remaining IPO proceeds are segregated in a trust account with a third-party financial institution. The funds can only be used for the post-IPO business combination, merger with or acquisition of a target business or for the redemption of the SPAC shares upon request by the shareholders. If the business combination, acquisition cannot be achieved within the specified timeframe, i.e. 18 – 24 months after the SPAC IPO, the SPAC shall be liquidated and the funds returned to the shareholders to redeem their shares in the SPAC. 

Since SPAC shareholders have the right to request the SPAC to redeem their shares, the SPAC shall redeem the shares with the funds set aside in the trust account upon receiving such request. A huge number of shareholders requesting redemption of SPAC shares means that a large portion of the funds in the trust account will be required to be paid out as redemption money, which the trust account may end up not having sufficient funds left to consummate any de-SPAC transaction. If the SPAC fails to raise additional financing for the de-SPAC transaction, it may end up not being able to complete the business combination, acquisition within the timeframe which will then lead to the liquidation of the SPAC.

 Future of SPACs?

Not knowing how much longer the COVID-19 pandemic will continue to affect our daily lives and the economy, particularly with the second, third or fourth wave hitting different parts of the world one after another and the record breaking high of daily new cases, it is difficult to predict market reaction to traditional IPOs and investors tend to adopt more conservative approaches in making investment decisions. While there are big name IPOs which the general public has been waiting for and current economic environment is not expected to have significant negative impact on their subscriptions, other small to mid-size IPOs are nonetheless going to be the hardest hit. Instead of going through the lengthy and costly IPO process and not knowing how well-received by the public their shares will be, a business combination, merger with or an acquisition by a SPAC would seem to be the more realistic way of exit of private companies. With the ever-growing number of SPAC IPOs and the funds raised through them, we can only expect to see the continuous thrive of SPACs at least during this period of uncertainty.

Disclaimer: Nothing in this article is meant to be or shall be construed as any legal advice on Hong Kong, US or the laws of any other jurisdictions referred to in this article or as any legal advice on SPACs to any person.

December 2020