In the last year, there has been an unprecedented surge of special purpose acquisition company (SPAC) formations. This has attracted a lot of attention to the SPAC space, from the sponsor side (traditional private equity firms, athletes, and celebrities) to the investor side (hedge funds and retail traders). Vast sums of capital and new found popularity have attracted private companies looking for potential exits or additional sources of capital. In addition, the Securities and Exchange Commission (SEC) recently expressed a strong interest in these vehicles.
While merging with a SPAC, a process known as a de-SPAC, may offer a compelling alternative for a private company, there are some unique considerations that companies should be cognizant of and weigh while contemplating a combination. Below is an overview of SPAC and de-SPAC transactions and key considerations for companies contemplating a combination with a SPAC.
SPACs are public companies that have no operations. These shell companies raise hundreds of millions of dollars through an initial public offering (IPO) with the sole goal of merging the shell company with an existing private operating company. The SPAC will register with the SEC for the issuance of units to the public for $10 per unit. The units typically contain one share of stock and a warrant for a fractional share of stock usually exercisable at $11.50. The money raised from the IPO is placed in a trust account to be used, together with additional financing, to complete the acquisition. After the IPO, the SPAC management team, typically made up of experts in a particular industry, has a limited time (usually 24 months) to find a suitable acquisition target and complete the transaction. If, after 24 months, the SPAC has not completed a transaction with an operating company, it must liquidate and return all of its IPO funds back to its shareholders.
De-SPAC Mergers – Operating Company Going Public
De-SPAC mergers take a private company public without using the traditional IPO process. The spac sponsors have a strong incentive to complete the merger because upon a liquidation, their founder shares and warrants will be worthless and they will be out of their at-risk investment which usually amounts to several million dollars. Once a target is identified the SPAC and the private company sign a letter of intent, begin due diligence, and negotiate the merger transaction.
The de-SPAC transaction may be structured as a merger, a purchase of stock, or a purchase of assets. The sellers of the target company may receive cash or equity or a combination of both. The structuring of these transactions usually involves negotiations of the SPAC sponsor's economics, including dilution of founder shares, earn-out criteria, and post-closing capitalization of the combined company. Also note that, due to the SPAC's IPO proceeds being in a protected trust account, the de-SPAC transaction agreement will not typically include a reverse break-up fee in the event of a broken deal.
The de-SPAC transaction agreement generally contains customary representations, warranties, conditions, and covenants which include obtaining regulatory approvals, necessary third-party consents, and the SPAC's shareholder consent for approving the de-SPAC transaction. In addition, SPAC-specific conditions may include minimum cash thresholds to be maintained in the trust account to limit shareholder redemptions.
Upon agreeing to a letter of intent and in advance of signing the de-SPAC transaction agreement, the SPAC will work to arrange committed debt or equity financing – e.g., a private investment in public equity (pipe) commitment – to finance a portion of the purchase price for the company and/or further capitalize the company. This financing is contingent upon the closing of the de-SPAC transaction.
De-SPAC Closing Process
In connection with the closing of a de-SPAC transaction, the public shareholders of a SPAC have the right to redeem their shares in exchange for the shares' pro rata amount held in the SPAC's trust account (roughly equal to the IPO share price). This redemption right is offered to the public shareholders through either the proxy statement soliciting approval for the de-SPAC transaction or the tender offer process.
The proxy statement or tender offer documents include the de-SPAC transaction agreement, audited financial statements of the SPAC and the target company, pro forma financial information, management's discussion and analysis of financial condition and results of operations, and selected audited and pro forma financial information. The disclosures also include information about director and officer compensation and risk factors that are similar to those provided in an Annual Report on Form 10-K or annual meeting proxy statement.
Within four days after consummating the de-SPAC transaction, the combined company files a Current Report on Form 8-K (a “Super 8-K”) disclosing, among other things, the de-SPAC transaction, financial statements and additional disclosures that would be required by a company in a Form 10 registration statement. Many of these disclosures are similar to those provided in the proxy statement or tender offer materials.