The Rise of the Special Purpose Acquisition Company (SPAC)
With the tumultuous chain of events we have witnessed throughout 2020, we have also been hearing more about the rise of SPACs. We have been getting asked more about SPACs such as what they are and what is their role within Wall Street?
A Special Purpose Acquisition Company or SPAC is known as a “blank check company.” This entity’s main function is to raise money through an initial public offering or an IPO in order for the SPAC to make strategic acquisitions by buying other companies.
SPACs raise money similar to a traditional IPO where the SPAC management team will arrange meetings with private equity and hedge fund players to discuss interest in the SPAC offering. These institutional investors will buy into the SPAC offering along with retail investors resulting in the SPAC’s funding. The funds are then moved into a trust until management decides how to deploy the capital.
SPACs may be a more suitable alternative way for some companies to get public funding for an IPO. For example when a private company is seeking an IPO, there are a myriad of steps to go through when dealing with the Securities & Exchange Commission (SEC).
Additionally, there are a lot of behind the scenes strategic conversations regarding how a company attains a particular stock price when it debuts on one of the stock exchanges. Pricing is important for companies for a number of different reasons including how much of a profit insiders could realize from selling, etc.
There are also institutional interests at play when it comes to an IPO. Towards the end of the process is when the company’s bank partner(s) assign a share price and then a block of shares are sold at the price to institutional investors who provide the liquidity.
After this process, the company begins the process of being traded on the open market. The problem lately with this is sometimes companies are underpriced from what underwriters believed would be a reasonable price for a company, which means that the block of shares sold to the institutional investors prior to the company’s first day on the market sold for less than the company could have realized. This means there was money oftentimes left of the table.
Not to mention that a company’s stock price goals could also be complicated by outside factors beyond a company’s control such as geopolitical risks and other headline risks that could affect the overall market the day that a company debuts. While companies do try and time these issues out, uncertainty still remains no matter what.
SPACs could offer more certainty and liquidity to companies seeking a direct listing since acquisition prices are pre-negotiated and there are less steps involved when it comes to the SEC, thus shielding companies from market volatility. Overall SPACs offer a faster timeline for companies to go public. SPAC shareholders have the ability to vote for or against an acquisition due to a SPAC’s corporate governance protocols.
As with anything new it wouldn’t be out of the question to expect for SPACs to receive additional regulatory scrutiny. SPAC interests should expect this, especially since there will be an upcoming Administration change.
At Lanton Law not only do we understand the issues, but we provide you with timely solutions to help you make informed decisions about either an acquisition target or ways to maximize value.
We counsel clients by performing corporate due diligence, provide strategic advice for growth and business strategies as well as structuring and executing M&A transactions.
If you are a financial stakeholder including a private equity firm, SPAC, hedge fund, bank, etc. we have a suite of strategic services that can help. Contact us today to learn more.