Editor’s Note: This blog series is presented in four parts. In this third edition, the author provides a brief overview of the mechanics of a SPAC transaction.
At its most basic level, a Special Purpose Acquisition Company (SPAC) is nothing more than a set of filings with securities regulators. The SPAC, like its blank check predecessor, conducts no business, has no revenue, and controls no assets. ((See Daniel S. Reimer, Special Purpose Acquisition Companies: Spic and Span, or Blank Check Redux?, 85 Wash. U. L. Rev. 931 (2007).)) The purpose of the SPAC is simply to facilitate the taking of a private company public. Therefore, the use of a SPAC falls under the broader category of corporate actions described previously as reverse mergers. ((See SEC Office of Investor Education and Advocacy Investor Bulletin: Reverse Mergers, Sec. and Exch. Comm’n (2011), https://www.sec.gov/investor/alerts/reversemergers.pdf.)) Again, this category refers generally to those transactions in which a public company will acquire a private company, with the goal of allowing the private firm access to public markets. The primary attraction of going public this way is the ability to avoid the longer and more expensive process of going through an initial public offering. ((See David N. Feldman, Reverse Mergers: Taking a Company Public Without an IPO 44 (Janet Coleman ed., Bloomberg Press) (2006).))
A SPAC transaction involves three constituents. The first is the group of founding shareholders that incorporate the SPAC entity. At the outset, these shareholders will generally be the management team that will both market the SPAC and search for an acquisition. ((Cynthia Krus & Harry S. Pangas, The SPAC Phenomenon: A Discussion of the Background, Structure and Recent Developments involving Special Purpose Acquisition Companies, Sutherland Asbill & Brennan LLP (July 24, 2006), http://www.mondaq.com/unitedstates/x/41456/Corporate+Governance/The+SPAC+Phenomenon+A+Discussion+of+the+Background+Structure+and+Recent+Developments+Involving+Special+Purpose+Acquisition+Companies.)) The second group is the underwriters. This group will be responsible for the successful execution of both the SPAC’s IPO, and often its later acquisition of an operating company. The third group is that of the outside investors who take majority ownership of the SPAC during its initial offering.
The SPAC will move though a timeline of corporate events, with specific considerations and restrictions relevant at each step. First, in order to access public markets the SPAC will have to file Form S-1 with the SEC. ((Id.)) This form will outline the general structure of the SPAC: the management team, the details of the securities to be offered, and the pertinent risk disclosures. ((Id.)) The investors in the SPAC are often purchasing not only shares in the company, but often also warrants which can be exercised for additional shares of common stock at a set price above the original IPO price. ((Id.)) Thus if the stock appreciates because of a merger, shareholders can exercise their warrants to buy more stock. The funds raised in the IPO will largely be placed in an escrow account, where it will sit waiting to be used in the subsequent acquisition of an operating company. ((Id.)) The amount not placed in escrow is utilized by the managers as working capital to fund the ongoing expenses of the SPAC, such as due diligence investigations of prospective targets, and legal and accounting expenses related to the pending acquisition. ((Id.))
Second, after raising capital, the SPAC will then set out to find its target company. The SPAC will only have a limited amount of time to do so. ((Id.)) For example, the listing requirements for the Nasdaq and the NYSE limit the company to 36 months from the IPO date. ((NASDAQ, IM-5101-2, Listing of Companies whose Business Plan is to Complete One or More Acquisitions. NYSE, Sec. 119, Listing of Companies whose Business Plan is to Complete One or More Acquisitions.)) Although the SPAC will generally be excluded from the requirements of Rule 419, SPAC mangers continue to frequently choose to provide investor protection voluntarily. ((Daniel S. Reimer, Special Purpose Acquisition Companies: Spic and Span, or Blank Check Redux?, 85 Wash. U. L. Rev. 931 (2007).)) The set time frame for an acquisition is one example of this behavior. The longer time frame allowed by exchanges is possible because the SPAC is not subject to the actual provisions of Rule 419. As another example of this behavior, the SPAC will often require itself to acquire a single operating business that has a fair market value in excess of 80% of the SPAC’s net assets. ((Id.)) This requirement is also supported by the listing requirements at the largest stock markets. ((See e.g. NASDAQ, IM-5101-2, Listing of Companies whose Business Plan is to Complete One or More Acquisitions.)) The SPAC will also often allow consummation of the merger only after approval by a majority of IPO shareholders. ((William K. Sjostrom, Jr., The Truth about Reverse Mergers, 2 Entrepreneurial Bus. L. J. 743 (2008) at 758.)) If shareholders decline the acquisition, the SPAC will liquidate and return the offering proceeds being held in escrow to the shareholders. ((David N. Feldman, Reverse Mergers: Taking a Company Public Without an IPO 44 (Janet Coleman ed., Bloomberg Press) (2006) at 187.))
Finally, in choosing a company to acquire, managers must be wary that they avoid discussions with potential targets prior to the SPACs’ IPO. If the SPAC has a target identified prior to this date, they might have to make certain disclosures regarding the target’s business, and the applicable risk factors of that business. ((Id. at 184)) Typically, the SPAC will focus on making an acquisition in a specific industry or geographical region. (( Id at 185)) This may be beneficial to the SPAC, as they can market the investment on the strength of the management team’s experience in a given sector. For example, Silver Run Acquisition Corporation filed its Form S-1 with the SEC, setting up a SPAC which “intend[s] to capitalize on the ability of our management team…to identify, acquire and operate a business in the energy industry that may provide opportunities for attractive risk-adjusted returns.” ((Silver Run Acquisition Corp., Our Company (Form S-1) (Jan. 27, 2016).)) The management team the filing refers to is, of course, headed by Mark Papa. ((Christopher Helman, America’s Great Oil Companies, Forbes, Aug. 12, 2013)) As stated, that SPAC was, in fact, successful in raising $450 million from its IPO. ((Lauren Hirsh, Silver Run raises $450 million in IPO to buy energy companies, Reuters, Feb. 23, 2016 available at http://www.reuters.com/article/us-silver-run-acqsn-ipo-idUSKCN0VW2MX.)) After the SPAC successfully completes its acquisition, the SPAC and the operating entity acquired will continue on as one, and are no different from any other publicly traded enterprise.
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