(Sowell Management) A special purpose acquisition company (SPAC) is a type of blank-check company that raises funds from investors through an initial public offering (IPO) for the purpose of acquiring another company.
SPACs have no assets or commercial operations at the time of their IPO, which explains why they are referred to as blank-check or shell companies. The target is either not yet identified or at least not disclosed, which makes for simple and straightforward disclosures in the SPAC’s S-1 documents.
SPACs are organized by sponsors, typically well-regarded executives who have credibility as managers and/or dealmakers in a specific industry. The sponsors risk their own capital to organize and take a SPAC public. Their compensation is in the form of a promote, typically 20% of the company, which becomes valuable only if an acquisition is completed within the pre-agreed timeframe. Outside investors are enticed to invest in the SPAC by the experience and credibility of the sponsors, the appeal of the industry the sponsors will focus on, and the structure of the SPAC stock which provides strong downside protection in the form of a put option to the issuer up to the point where investors approve a proposed acquisition.
OUR CASE STUDY: A GENERIC SPAC TRANSACTION FROM IPO TO ACQUISITION
This case study presents the main actors and steps involved in a typical SPAC transaction from its formation to the completion of an acquisition. We will discuss the role and incentives of the SPAC’s sponsors, the investors in the public stock, the owners of the business that the SPAC will acquire, and the management of the business who typically end up managing the de-SPACed public company going forward.
The Sponsors Form the SPAC
Three business partners with reputable credentials in an attractive industry form a SPAC—one of them will serve as the SPAC’s Chairman, another as Chief Executive Officer (CEO), and yet another as Chief Financial Officer (CFO). They will not receive any salary from the SPAC but will receive a promote that will become valuable if and only if the SPAC completes an initial business combination (IBC). The sponsors will use their expertise in their industry of choice to identify a company for the SPAC to acquire.
In our case study, these three partners own Sponsor LLC in which they have invested $10 million of their own capital. Sponsor LLC uses this capital to buy B shares and warrants in the SPAC. In turn, the SPAC uses this capital to fund its operations prior to the upcoming IBC. The SPAC needs this source of capital because the funds they will raise in the IPO will go directly, and in their entirety, into a trust fund to be returned to investors in case the SPAC does not complete an IBC or if some or all investors decide to redeem their stock before the IBC is completed. (The SPAC common stock investors have effectively a put option up to the completion of the IBC.)
The SPAC’s main expenses prior to the acquisition, funded by the sponsors’ capital, will be the IPO fees to the IPO manager, legal and accounting expenses (to prepare the IPO documents), directors and officers (D&O) insurance, and trust expenses. Once the SPAC goes through its IPO, its management team will focus on identifying a target company for the SPAC to buy.
For more, please download the white paper at sowellmanagement.com.
