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A SPAC is an empty company that is listed on an exchange. Funds are raised via this company being floated, which are then used to take over another company in its specialising industry. With ‘approximately $6.5bn raised over the past 18 months,’ SPACs have become a significant tool for companies that are looking to go public, and institutional investors who are increasingly interested in using the method to bring returns to their customers.
A SPAC is a special purpose acquisition company, which is sometimes referred to as a ‘blank check company.’ A SPAC is a form of shell corporation, listed on a stock exchange to raise funds, to acquire another, usually private, company. In doing this, a SPAC can finance a merger or an acquisition, within a set timeframe.
SPACs usually focus on a range of industries and geographies, which the board’s experience would be a testament to, though the company reserves the right to invest in whatever it deems fit.
SPACs are heavily reliant on board members, both from a reputational standpoint, to give the company credibility to investors; while also from a sponsorship standpoint, to provide some initial form of liquidity to get the IPO process off the ground.
From an investors point of view the board is of high importance, not only for pre-listing investors, but also post-listing. Market participants need to have the confidence that the board is able to source and structure a transaction down the line. This will frequently lead to the shareprice of the empty SPAC increasing as there has to be freefloat and some of the initial investors will be tempted to take profits, while outside investors will speculate on the boards ability to deliver and purchase shares.
The SPAC would generally trade as units of separate shares or warrants (the right to purchase stock at a specific price and specific date) – but is ultimately held to a liquidation date. This is a set date, usually, two years in the future, by which the SPAC must have completed a merger or acquisition, or face dissolution and the return of assets to stockholders. This date can be extended, using sponsors’ contributions to the company’s trust account, encouraging shareholders to vote in favour of delaying the liquidation date and bringing further confidence in the venture.
SPACs are increasingly popular amongst private companies, intending to go public, as this process allows for a smoother transition to being a publicly-traded company by being taken over by a SPAC.
Aiming to go public with the use of a SPAC is increasingly popular across the industry, and comes with an extensive list of benefits. However, SPAC usage isn’t a one-way street, and there can be some drawbacks for clients to be aware of whilst engaging in the process.
First and foremost, SPACs offer a highly effective route into the market through equity and floatation on an exchange, outside of the traditional and time-consuming IPO process, particularly in its uniqueness as a funding vehicle.
For example, SPACs are able to perform secondary offerings after the acquisition of private companies to fully enter the SPAC onto the public markets, often through sponsors selling their warrants. SPACs are also capable of performing reverse takeovers, in which the privately held company would be able to immediately become publicly traded, without moving through the expensive IPO process.
SPACs are also highly flexible, as the board have no reason to take full control over the board of a target and lose this expertise as a result. SPAC sponsors/investors can integrate into the existing company as a partner to provide liquidity and capital to assist the growth of the company alongside existing senior management. This is compounded by considering the specialisation and expertise that sponsors can bring to the table.
Though it must be said that there can also be problems regarding the future viability of the merged business, particularly dependent on the overall involvement of the sponsors. For example, aiming to control 100% equity within the target company can become an issue down the line when aiming to integrate existing personnel with sponsors and investors. However, most analysts agree that with a combined and integrated approach to a takeover or reverse merger, there is great potential for SPAC-acquired companies to flourish.
Furthermore, with a SPAC, there is no risk within the merger from liabilities or issues with compliance, due to the company being brand new. As the SPAC has not taken part in any material business, there is a clear pathway towards closing the deal.
However, those using SPACs must be aware that due to the flexibility of funding, some unique risks must be managed. Investors in the SPAC retain the right to redeem their equity at the time of the initial business combination if they would prefer not to maintain their investment through the merger. This can create an issue around cash flow, potentially undermining the transaction itself if sponsors are unable to provide enough cash.
SPACs can provide equity capital easily to help the absorbed company to grow in its chosen field or geography. Providing permanent capital is useful as it allows a more long-term approach to the business, rather than being held hostage to the debt service costs, amortization or any covenants inherent within debt capital often offered by private equity firms.
In short, SPACs have significant potential for usage, particularly in the UK and European market where they have gone largely unnoticed. At Swordblade, risk and suitability checks for SPACs as a business model and strategy can and will be carried out, to ensure that using such a method isn’t just only one of the most fashionable, but that it is also the most valuable to a client.
US SPACs are fundamentally based on the practice of the total proposed investment being collected from investors at the time of a SPAC listing before the final target is established. This means the investor is essentially being asked to trust in the board and initial sponsors, investing before understanding the full breadth of the final product. These SPACs are heavily regulated and supervised by the SEC and various safeguards are being put into place to protect investor funds, though the fact that investors bear the burden of risk and the costs of finding and securing a target – which might take a considerable amount of time.
However, this style of SPAC is becoming increasingly popular in the US, and as a result, demand for private business is growing whilst the supply of takeover-ready companies is ever dwindling. This makes this approach to a SPAC more challenging, with increasing costs, more risk and lower returns as a result – the initial building of a SPAC is easier than building a new, successful business.
On the other hand, in the UK (and the rest of Europe), SPACs are structured differently. Instead of raising funds required to buy a business, without actually knowing the target enterprise, the founders of the SPAC only raise enough funds to list the SPAC on the regulated market on the exchange. This would mean listing on the LSE with a market cap of a minimum of £750,000 or above.
These funds would typically be raised amongst the sponsors and directors of such a SPAC, usually professional and highly sophisticated investors rather than in the retail space – a fundamental difference to the US model. For the listing to occur a prospectus has to be written and approved by an FCA approved solicitor and/or the FCA. As discussed, the major concern would then turn to the client’s stated goals in the restructuring and governance of the newly SPAC acquired company, meaning all board members would have to have the confidence of the FCA and pass the Fit and Proper Persons Test.
Once a target has been identified, the SPAC would then embark on a major capital increase to fund said purchase, usually via a second offering, issuing new shares at a more appropriate valuation. Therefore in this model, the investor is aware of what they are buying, and the process is far less speculative – particularly as a prospectus has to be written for the capital increase. Furthermore, the regulator and exchange alike will have a clear plan on the use of funds, and so will be able to offer investor protection should something in the process go wrong.
Roquefort Investments PLC was incorporated in August 2020, with a highly experienced board, and listed on the London Stock Exchange’s Standard List in March of 2021. Roquefort was able to raise £1 million during their issuing at 5p per share, with the aim of this capital being to acquire an ‘early stage’ business in the medical biotechnology sector, an industry in which the sponsors (the board) specialise.
Roquefort Investments is not a client of Swordblade nor is affiliated in any other way than by use as a case study in this scenario.
The directors and founders invested £120k of their own money to get the venture initially off the ground, and an IPO raised an extra £1 million, which after expenses of £185k were incurred whilst raising the money, left £940k. The total amount of shares issued was 32,400,000.
However, alongside this, 25,480,000 warrants were also issued, allowing for the purchase of more stock at certain, predetermined prices. For example, the seed and founders were issued with 12,000,000 warrants at 10p each – however this will only be realised if and when the company is successful in its acquisition of another biotechnology company.
A SPAC would be registered and publicly traded before any acquisition could take place, as the target of a takeover would be identified after the initial fundraising process. From there, members of the general public, non-institutional investors and others can purchase shares. The basic process is outlined here in bullet points, explicitly in the case of London:
The SPAC would be formed with a board with significant expertise to reassure investors of its long-term future growth and potential and begin the IPO phase. This usually focuses upon an investment thesis, alongside the background and initial backing from sponsors.
As in the usual IPO process, after a client has engaged Swordblade as advisers, we would begin to understand the business model and engage trusted solicitors to begin drawing up documentation for the equity offering (in the case of London, a prospectus to be approved by the FCA). The aim would be to prepare a strategy that achieves the stated goals of a client, ensuring that the ability to move forward and takeover another company is possible. More on the IPO process can be found here.
After the capital raise, via offering shares (or, in our example of Roquefort, warrants) – the majority of returns from investors would be held in a trust account. Often, the capital may be held in other money markets, for example, US Treasuries; safe instruments to ensure the maintenance of purchasing power after the initial capital raising.
From here, sponsors would use their industry knowledge and their network to source a target for acquisition. Normally the terms of the SPAC set a fixed period of 18-24 months to complete an acquisition of a company or an asset.
Negotiations between the SPAC and target company would be conducted, and, if successful, an investor meeting and shareholder vote would approve the merger. If necessary, the SPAC would use debt and further equity issuance to fund the acquisition and encourage shareholders of their commitment and viability of the business.
From then on, the SPAC must be aware of compliance issues with making a private company publicly traded, including (but exclusively):
More information about SPAC’s and the issuing process can be found here.
SPACs have been present within the US equity market since the early 1990s, although at this time they were somewhat dubious as a method of funding takeovers. Today, SPACs are an accepted institutional class of investment, with increased sponsor quality and transparency, a significant uplift in the average size of offerings – now underwritten by some of the largest investment banks and institutional investors worldwide.
Much of the reason that SPACs haven’t proven popular in Europe, meaning the continent seems ripe for a boom in SPAC related business, is the hesitancy of the continent. SPACs never truly shook the poor reputation of the 1990s in Europe, with many seeing them as too high risk, with money being placed in a company with only a board to show for it. To compound this, many stock exchanges in Europe refused to list SPACs, owing somewhat to regulatory issues, but mainly to the reputational risk that those exchanges took on by allowing the SPAC to be floated.
SPACs are becoming more and more popular in Europe, and particularly in the UK due to regulatory changes which are increasing enthusiasm. With the revision of rules planned by the UK government, there is a likelihood that more SPAC business will be driven to London. The proposed reforms include an introduction of shareholder protections, for example, votes on acquisitions and redemption rights.
If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.
The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.
We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.
Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.