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    Finance (Special Purpose Acquisition Company – SPAC)

 

  • Negotiation and drafting of all agreements, contracts, documents, forms and templates related to special purpose acquisition company (SPAC) transactions, such as: agreement and plan of merger; amendments; backstop agreement; backstop equity commitment letter; commitment letter; definitive business combination agreement; definitive merger agreement (DMA); definitive proxy statement; definitive purchase agreement (DPA); equity forward agreement; forward purchase agreement; investor letter; investors’ rights agreement; lock-up agreement; notice of special meeting; option agreement; pipe subscription agreement; pitch deck; placement unit subscription agreement; prospectus; proxy notice; proxy statement; registration rights agreement; registration statement; SEC documents (such as: 8-K; 10-K; 10DEF 14A; 20-F; 425; 10-Q; F-3; S-1; S-4; Schedule 13D; Schedule 14A); securities subscription agreement; stock purchase agreement (SPA); subscription agreement; tax receivable agreement; unit subscription agreement; warrant agreement.

 

  • Compliance with applicable Federal acts, agencies, guidelines, laws, regulations, rules and statutes, and industry trade organizations, relating to the securities industry in general, such as the: 1933 Securities Act; 1934 Securities Exchange Act; 1939 Trust Indenture Act; 1940 Investment Advisors Act; 1940 Investment Company Act; 1970 Securities Investor Protection Act; Securities Investor Protection Corporation (SIPC); 2002 Sarbanes-Oxley Act; 2010 Dodd-Frank Act; 2012 Jumpstart Our Business Startups (JOBS) Act; Consumer Financial Protection Bureau (CFPB); Financial Industry Regulatory Authority (FINRA); Public Company Accounting Oversight Board (PCAOB); United States (US) Securities and Exchange Commission (SEC).

 

  • SPAC Concept

 

  • A SPAC is, in general, a very speculative, publicly-traded shell company (pursuant to Rule 405 of the 1933 Securities Act, a “shell company” may be a paper company with no assets, facilities or products), without any established business plan, to raise capital through an initial public offering (IPO), with the intention of using that capital for the acquisition of a target private business.

 

  • The SPAC is originally formed by a sponsor entity (such as an individual investor, financial manager, growth equity fund, hedge fund, private equity sponsor, or a team of the like), perhaps in Delaware, the Cayman Islands or the British Virgin Islands as a shell company.

 

  • The SPAC will then register an offer and sale of redeemable securities for cash through a conventional underwriting, sell such securities primarily to hedge funds and other institutions through an initial public offering (IPO), and then place at least ninety percent (90%) of the IPO proceeds in a trust account for a future acquisition of a private operating company.

 

  • Then after the completion of the SPAC IPO, the SPAC will immediately begin to search for a target private entity acquisition candidate (the SPAC is not allowed to begin any such search prior to the completion of the IPO) and then attempt to close a proposed business combination transaction with the chosen target private entity within at least twenty-for (24) calendar months – the time period generally specified in the SPAC charter – but no longer than thirty-six (36) calendar months – the maximum time period allowed by the National Association of Securities Dealers Automated Quotations (NASDAQ) and the New York Stock Exchange (NYSE) – to close a proposed business combination after the completion of the SPAC IPO, and if successful, the former original SPAC entity combined with the former target private entity, now one combined company, will together continue the operations of the former target private entity as a single public company.

 

  • However, if the SPAC fails to find and acquire a target within the allotted time period, all investor funds must be redeemed, all funds provided by the sponsor are forfeited and the SPAC must be liquidated.

 

  • A big advantage of the SPAC IPO process over the traditional IPO process may be the time savings – in general, a de-SPAC (the end-process of the SPAC lifecycle, acquiring a target company and commencing combined operations) may be completed in perhaps as little as thirteen (13) weeks, whereas the traditional IPO process may take perhaps at least twenty-six (26) weeks.

 

  • Some differences between a SPAC IPO and a traditional merger are generally apparent after the due diligence phase for acquiring the target private entity, such as: the SPAC shareholders must approve the deal through a proxy statement, by whatever majority is required in the SPAC by-laws for this type of transaction; there is a redemption opportunity for SPAC shareholders, potentially through a tender offer; there are securities laws and regulations imposing post-transaction restrictions on how and when SPAC shareholders may dispose of their shares; there is greater flexibility allowed when determining the consideration for the deal; there is greater risk involved, since there is very limited recourse of the de-SPAC fails.

 

  • SPAC Formation

 

  • Once the sponsor entity has formed the SPAC entity (which at that point would be a private entity), the sponsor entity’s initial focus is to register shares and get the SPAC listed on an exchange (thus becoming a publicly-traded entity), such as the National Association of Securities Dealers Automated Quotations (NASDAQ) or the New York Stock Exchange (NYSE), through an IPO.

 

  • NASDAQ Listing requirements relevant to SPACs (paraphrased from the NASDAQ Rulebook) may be:

 

  • NASDAQ will generally require a letter of intent (LOI) from the managing underwriter of the IPO, that would include affirmative representations by such underwriter that the IPO is in full compliance with all listing rules and applicable laws.

 

  • NASDAQ requires that the business combination must be with an entity having an aggregate fair market value of at least eighty percent (80%) of the SPAC trust account.

 

  • NASDAQ requires that a SPAC complete a business combination within twenty-four (24) calendar months to thirty-six (36) calendar months (or shorter, as may be specified in the SPAC registration statement) of the SPAC IPO registration statement.

 

  • NASDAQ may require the SPAC to provide non-objecting beneficial owner (NOBO) – purchasers who allow the release of their name and address to the companies in which they have purchased securities, generally for the purpose of allowing such companies to send financial reports, notices, voting proxies and the like to such purchasers – reports and share range analyses from financial reporting companies such as Broadridge Financial Solutions, Inc. or Mediant Communications Inc. after the closing of the SPAC IPO.

 

  • For immediate acceptance of a potential NASDAQ listing using a share range analysis (an analysis of the anticipated high and low price of a stock, used as an indicator of risk) situation, NASDAQ requires that there would be at least four hundred (400) or more round lot holders – a “round lot holder” is a holder of at least one hundred (100) shares – at least fifty percent (50%) of whom must hold unrestricted units (not subject to a vesting period), of at least two thousand five hundred dollars ($2,500) in value.

 

  • If there are more than three hundred (300) round lot holders but fewer than four hundred (400) round lot holders, the NASDAQ examiner may request more information from the managing underwriter about the composition and qualifications of the round lot holders, in an attempt to confirm whether some such round lot holders actually hold multiple accounts, and may require some written assurance from the managing underwriter that all underwriters intend to sell the securities in a manner so that after the completion of the IPO, there will be at least three hundred (300) round lot holders that have unrestricted securities, at least fifty percent (50%) of whom must hold unrestricted units (not subject to a vesting period), of at least two thousand five hundred dollars ($2,500) in value, as if they had been sold in transactions to the category of four hundred (400) round lot holders.

 

  • If there are 300 or fewer round lot holders, the NASDAQ examiner will reject the potential listing.

 

  • NASDAQ may request a complete list of all round lot holders within fifteen (15) calendar days after the closing of a SPAC IPO.

 

  • NASDAQ allows SPAC shareholders to vote in favor of the business combination and still redeem their shares.

 

  • NYSE Listing requirements relevant to SPACs (paraphrased from the NYSE Listed Company Manual – LCM – Section 102.06, entitled “Minimum Numerical Standards - Acquisition Companies”) may be:

 

  • At least ninety percent (90%) of the proceeds from a SPAC IPO, as well as the proceeds from any other concurrent sales of the SPAC’s equity securities, must be held in a trust account controlled by an independent custodian until the actual closing of a business combination, in which the target private entity must have a fair market value of at least eighty percent (80%) of the net assets (meaning gross minus amounts disbursed to management for working capital purposes, excluding the amount of any deferred underwriting discount held in trust) held in the trust account (“business combination condition”).

 

  • The SPAC must have an IPO price per share of at least four dollars ($4.00) per share at the time of the initial listing.

 

  • The SPAC must have: an aggregate market value of at least one hundred million dollars ($100,000,000); and, a minimum of one million one hundred thousand (1,100,000) publicly-held shares, with a market value of at least eighty million dollars ($80,000,000); and, at least three hundred (300) round lot holders (with the following conditions: shares held by directors, officers, or their immediate families and other concentrated holdings of ten percent – 10% – or more are excluded in calculating the number of publicly-held shares; for SPACs that list at the time of their IPO, the NYSE will rely on a written representation from the managing underwriter about the anticipated value of the SPAC's offering in order to determine an SPAC's compliance; if a unit trades at less than one hundred – 100 – shares, the requirements relating to number of publicly-held shares will be reduced proportionately; the number of beneficial holders of stock held in the name of NYSE member organizations will be considered in addition to holders of record).

 

  • If the SPAC holds a shareholder vote on a proposed business combination for which the SPAC must file and furnish a proxy or information statement subject to Regulation 14A or 14C under the 1934 Securities Exchange Act in advance of the shareholder meeting, then the proposed business combination must be approved by a majority of the votes cast at the shareholder meeting at which the proposed business combination is being considered.

 

  • if a shareholder vote on a proposed business combination is held, then each public shareholder voting against the proposed business combination will have the right ("conversion right") to convert its shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account (net of taxes payable, and amounts disbursed to management for working capital purposes), provided that the proposed business combination is approved and closed.

 

  • The SPAC may establish a limit – but not less than ten percent (10%) of the shares sold in the SPAC IPO – as to the maximum number of shares with respect to which any public shareholder, together with any affiliate of such shareholder or any person with whom such shareholder is acting as a group – as “group” is used in Sections 13(d) and 14(d) of the 1934 Securities Exchange Act – may exercise conversion rights.

 

  • If a shareholder vote is not held on the proposed business combination for which the company must file and furnish a proxy or information statement subject to Regulation 14A or 14C under the 1934 Securities Exchange Act (Act), then the SPAC must provide all shareholders with the opportunity to redeem all their shares for cash equal to their pro rata share of the aggregate amount then in the trust account (net of taxes payable, and amounts disbursed to management for working capital purposes), pursuant to Rule 13e-4 and Regulation 14E of the Act, regarding issuer tender offers, and the SPAC must file tender offer documents with the SEC, containing substantially the same financial and other information about the proposed business combination and the redemption rights as would be required under Regulation 14A of Act, regarding the solicitation of proxies.

 

  • Unless the business combination condition (referenced in the first sub-bullet point above) has been satisfied, each proposed business combination must be approved by a majority of the SPAC independent directors.

 

  • The SPAC must be liquidated by the SPAC sponsor entity if the SPAC has failed to close any proposed business combination within a specified time period, which must be the shorter of either the time period specified in its charter – which is generally twenty-four (24) calendar months, but may be extended by vote – or thirty-six (36) calendar months, and at the expiration of such time period, the NYSE will promptly commence delisting procedures for any such SPAC.

 

  • In the event of liquidation, the SPAC’s founding shareholders must waive their rights to participate in any liquidation distribution regarding all the shares of common stock they owned prior to the SPAC IPO or that were purchased in any private placement occurring in conjunction with the SPAC IPO (including the common stock underlying any founders’ warrants), and all the underwriters of the SPAC IPO must agree to waive their rights to any deferred underwriting discount that may have been deposited in the trust account, in the event that the SPAC liquidates prior to the completion of a proposed business combination.

 

  • In the event that the SPAC securities are listed as units, any components of such units other than common stock – such as warrants – must meet the applicable initial listing standards for the security types represented by those components.

 

  • Factors that the NYSE may consider when determining the suitability for listing of an SPAC, may include, but may not necessarily be limited to: the management experience and track record; the nature and extent of management compensation; the extent of management’s equity ownership in the SPAC; any restrictions on management’s ability to sell SPAC stock; the time period permitted in the SPAC charter for the completion of a business combination prior to the mandatory liquidation of the AC; the extent of management’s equity ownership in the SPAC; any restrictions on management’s ability to sell SPAC stock; the percentage of the trust account contents that must be represented by the fair market value of the business combination; the percentage of voting publicly-held shares whose votes are needed to approve a proposed business combination; the percentage of the proceeds from the sale of the SPAC securities that is placed in the trust account; any other factors may wish to consider that are consistent with the goals of investor protection and the public interest.

 

  • Because of the some differences between a traditional IPO and a SPAC IPO (particularly the difference that in a traditional IPO the private company and the securities it offers for sale on an exchange are valued as a result of market-based popularity, whereas once a SPAC IPO has been completed, and the management group of the SPAC sponsor entity, consisting perhaps of individual sponsors, directors, officers, affiliates and institutions – such as investment banks and bulge bracket underwriters – has identified a target private entity with which they would like the SPAC to form a business combination, the particular biases and preferences of that SPAC management group for the target private entity might lead the SPAC management team to enhance their valuation recommendations to their public shareholders about that target private entity to the point where that SPAC management group’s enhanced valuation recommendations may be beneficial for them, but detrimental for their public shareholders, thus causing an obvious conflict of interest between the SPAC management group and their shareholders), at least one division of the Securities and Exchange Commission (SEC), which regulates the SPAC IPO and its continuing operations, has issued some unofficial detailed guidance – CF Disclosure Guidance: Topic No. 11 – about full transparency and disclosure by the SPAC management group to their public shareholders, and how the SPAC management group should disseminate complete and unbiased information about whatever recommendations they may care to make to their public shareholders at various points in the decision-making process.

 

  • Although the SPAC sponsor entity management group may set a particular valuation at the time the business combination with the target private entity is announced, the SPAC sponsor entity management group will be more than likely open to renegotiating that valuation if market conditions indicate that the reaction is less than anticipated, since the failure of the SPAC might mean the loss of their capital and effort (for example, if there may not be enough time left in the period for acquiring a target private entity to identify and combine with a new target private entity).

 

  • Since the sponsor entity’s ultimate goal is to complete a combination with an as-yet-unidentified private entity within twenty-four (24) months from the anticipated SPAC IPO, the sponsor entity will probably choose an exchange with strong representation in the business sector in which the SPAC will eventually search for a target private entity, and which has listing requirements that are easiest from a compliance standpoint for the particular SPAC.

 

  • In consideration for all the work the SPAC investors in the sponsor entity do to get a SPAC off the ground, and their initial infusion of funding for the SPAC, the sponsor entity generally receives an allotment (also called the “promote”), of “founders’ shares” – generally calculated to be at least twenty percent (20%) of the SPAC’s total post-IPO common shares – as a separate class of stock for a nominal purchase price; such founders’ shares are generally subject to lockup agreements until the completion of the business combination.

 

  • By way of compensating SPAC investors in the SPAC for the illiquidity caused by the requirement for the SPAC to deposit all or most of the SPAC IPO proceeds in an interest-bearing trust account (with restrictions on any proceeds not deposited limiting the use of such proceeds to use for the business combination expenses or limited redemptions for investors), such SPAC investors will also be given the right to purchase warrants to buy additional stock as at a fixed price, which will eventually be redeemable at some premium above the SPAC IPO share price, where the aggregate cost of such warrants may be approximately two and five tenths percent (2.5%) of the SPAC IPO share price, and the proceeds of the sale of such warrants will be used to pay the SPAC IPO expenses – including a two percent (2%) initial underwriting fee – and other pre-business combination costs (but the SPAC investors do not receive any management fees unless and until the business combination is completed, and will have no right to any compensation if the SPAC is liquidated).

 

  • Founders’ shares generally also include anti-dilution protection (provisions hedging against any decrease in the individual value per share resulting from an increase in the total number of issued shares), and until the de-SPAC occurs, only the holders of the promote shares will be able to vote for the SPAC board of directors.

 

  • SPACs may often be referred to as “blank check companies” even though the structure of a SPAC was actually designed with the intent to be exempt from regulation as a blank check company pursuant to Rule 419 of the 1933 Securities Act (based on the value of its net tangible assets), since Rule 419 imposes many restrictions on a blank check company that would have hampered the ability of the SPAC to acquire a target private entity, such as: the prohibition against trading of its common equity until an acquisition; and, the requirement to deposit all proceeds and securities into a restrictive escrow account.

 

  • Although SPACs may have some operating characteristics that may be similar to the Rule 419 requirements for blank check companies, SPACs must not follow Rule 419 requirements literally, or else they would be classified as a blank check company in all respects, so there are some slight differences in the way SPACs operate, such as: pursuant to National Association of Securities Dealers Automated Quotations (NASDAQ) rules, at least ninety percent (90%) of SPAC offering proceeds are generally deposited in an interest-bearing trust account – whereas Rule 419 requires that a blank check company must deposit the net offering proceeds (gross proceeds minus allowable deductions, expenses and underwriting commissions) in an escrow account; such net offering proceeds are generally invested only in securities that are either direct obligations of the United States (US) or are obligations guaranteed by the US, with a 180-day or less maturity for money market funds, in compliance with Rule 2a-7 of the 1940 Investment Company Act – whereas a blank check company may only invest net proceeds in specified securities, which may include money market funds; the SPAC pays the interest from the trust account to the investors – whereas the blank check company must hold the interest in an escrow account for the benefit of the investors; pursuant to NASDAQ rules, the fair value of the target private entity must generally be at least eighty percent (80%) of the balance in the trust account – whereas with a blank check company, the fair value or net assets of the target private entity must generally be at least eighty percent (80%) of the maximum offering proceeds; the SPAC units maytrade units as of the date of the SPAC IPO, any business combination has been completed, as long as the SPAC files a SEC Form 8-K, including updated financial information – whereas a blank check company is not allowed to trade any units, underlying shares and warrants until the business combination has been completed; SPAC warrants cannot be exercised until the later of either thirty (30) calendar days after the completion of the business combination or twelve (12) calendar months from the closing of the SPAC IPO – whereas with a blank check company, warrants could be exercised prior to the completion of a business combination, but any securities received or cash paid would have to be deposited into the escrow account; in a SPAC, a shareholder vote may not be required for the election to remain as an investor, but if there is a shareholder vote, the SPAC may offer to redeem shares – whereas with a blank check company, a prospectus regarding the business combination would go to each investor, who would have the opportunity to decide if he or she elects to remain a shareholder or would require the return of their investment; the business combination in the SPAC lifecycle must be completed within twenty-four (24) months of the SPAC IPO – whereas a business combination with a blank check company must be completed within eighteen (18) months; in a SPAC transaction, any proceeds in the trust account will not be released (except for disbursement of interest to pay income taxes and for limited use as working capital) until the earliest of either the completion of the combination, or the redemption of any shares in connection with a shareholder vote, or the redemption of all shares in the case where the SPAC was unable to complete a business combination within the 24-month deadline so the SPAC must be liquidated – whereas with a blank check company, any proceeds in the escrow account will not be released until the earlier of either the completion of a business combination within the 18-month deadline, or the failure to complete a business combination by the expiration of the 18-month deadline.

 

  • Regarding the contrast between a SPAC and a blank check company, SPACs were handed a loophole in 1995, when Congress passed the Private Securities Litigation Reform Act (PSLRA), which was intended to limit frivolous securities lawsuits, and which included a safe harbor regarding statements about financial projections that specifically excluded from the safe harbor any statements made in connection with several specified types of securities offerings, including statements made in connection with an offering of securities: by a “blank check company”; by a “penny stock” issuer; and, those made in connection with an initial public offering (IPO).

 

  • The PSLRA limited its definition of a “blank check company” to one that issues “penny stock” (combining references to the 1933 Securities Act Rule 419 defining a “blank check company” and to the 1934 Securities Exchange Act Rule 3a51-1(g) defining a “penny stock” issuer), thus creating some confusion by overlapping the safe harbor exclusion for blank check companies with the safe harbor exclusion for penny stock issuers, and by also not having any PSLRA definition for “initial public offering”.

 

  • So SPACs intentionally take advantage of this definitional confusion to avoid classification as either a blank check company or as a penny stock issuer, thus allowing them greater latitude when performing their operations concerning their proposed IPO than would be given to either a blank check company or to a penny sock issuer.

 

  • SPAC IPO

 

  • The administrative steps the SPAC sponsor entity should perform in preparation for the anticipated IPO may be to: file the SEC Form S-1 registration statement with the SEC; file a listing application with the exchange it has chosen; and, do a filing with the Financial Industry Regulatory Authority (FINRA) regarding whether the underwriting compensation is “fair and equitable”, and the underwriters may not proceed to participate in the anticipated SPAC IPO until the underwriters receive a “no objection” letter from FINRA.

 

  • To facilitate the SEC and FINRA regulatory review process for the anticipated SPAC IPO, the SPAC sponsor entity should not have taken any steps, whether formal or informal, to search for any target private entity before or during the IPO process – such activities are only permissible for the SPAC sponsor entity during the 24-month period following the completion of the SPAC IPO.

 

  • Regarding potential exchanges for the anticipated SPAC IPO, if the post-IPO SPAC shares are listed on NASDAQ and NYSE, they are considered to be “federally covered”, and so the issuer is exempt from state “blue sky” regulation, all listed SPACs must comply with all listing requirements, including for example: payment of all listing and related fees; having a deal structure that is not considered to be a reverse merger; and, annual attestations from officers.

 

  • Regarding some general contrasts between NASDAQ and the NYSE: NASDAQ requires a minimum of three hundred (300) discrete individual round lot holders for the initial listing, and then at least three hundred (300) public shareholders for continued listing, whereas the NYSE requires at least four hundred (400) holders of round lots and one million one hundred thousand (1,100,000) publicly held shares, and SPACs must demonstrate a minimum two hundred fifty million dollar ($250,000,000) aggregate market value, a two hundred million dollar ($200,000,000) market value of publicly-held shares, and have a minimum four dollar ($4.00) closing price or IPO price per share at the time of initial listing; NASDAQ requires thatEach business combination must be approved by a majority of the SPAC’s independent directors, and that if the SPAC submits the proposed business combination to a shareholder vote, then the SPAC must file a proxy statement or information statement, whereas the NYSE only requires that each business combination must be approved by a majority of the SPAC’s public shareholders.

 

  • In terms of corporate governance, the SPAC underwriters (any entity that evaluates and assumes another business entity’s risk for a fee – for SPACs, underwriters may be large investment banks – such as Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley – or securities firms, such as Cantor Fitzgerald & Co and EarlyBirdCapital, Inc.) may be very influential in the pre-IPO structuring of the SPAC, but in general, the SPAC will have the same committees and internal operating structures that are common to publicly-traded entities.

 

  • The underwriters may also require the sponsor entity to enter into various agreements such as: lockup agreements; pre-IPO sponsor warrant purchase agreements (in which the purchase of warrants will occur concurrently with the IPO closing); redemption rights agreements (for public shareholders upon completion of the business combination); registration rights agreements.

 

  • The anticipated SPAC IPO will consist of “units” – one share of common stock plus one or two (2) warrants, exercisable at some point in the future (either until the completion of a business combination between the SPAC and the target private entity, or upon liquidation for failure to form a business combination within the 24-month deadline) for one share of common stock – the price for which is generally set at ten dollars ($10.00) per unit.

 

  • Investors will generally separate (“split”) units into their common share components and warrant components on a voluntary basis within forty-five (45) to ninety (90) calendar days after the date of the SPAC IPO, with the exercise price for the warrants varying based on the IPO price, depending on the warrant exercise ratio from warrants to common stock, which may range from 3:1 to 1:1, and will be redeemable for nominal value if the SPAC shares trade at a price above the set market price.

 

  • De-SPAC

 

  • In general, after completion of the SPAC IPO, the SPAC sponsor entity must: file SEC forms (8-K, 10-K, 10-Q, proxy statements, Section 16 reports – by the executive officers and directors, and the like) with the SEC as required; comply with the 2002 Sarbanes-Oxley Act (including certifications required pursuant to Sections 302 and 906) and, the 2012 Dodd-Frank Act.

 

  • A SPAC is prohibited from attempting to identify potential target private entities prior to the SPAC IPO, so as soon as possible after the SPAC IPO, the SPAC sponsor entity must immediately begin searching for a target private entity to acquire, in the period usually within twenty-four (24) months after completion of the SPAC IPO.

 

  • If the SPAC does not complete the business combination with the target entity generally within twenty-four (24) months, or as may be extended by the vote of the SPAC shareholders, then the SPAC must be liquidated and the investors’ shares must be redeemed with interest (but founders’ shares will not be redeemed for cash in the event of liquidation).

 

  • Advantages to the target private entity of entering into a business combination agreement with the SPAC, rather than attempting to achieve an IPO on its own may be: access to the sponsor’s experience, expertise and personnel; avoiding preparation costs and time periods to prepare an IPO; avoiding volatility in the equity market; avoiding whatever reasons may have prevented the target from raising equity capital and then accomplishing an IPO itself to become listed on an exchange, within a specific length of time – generally perhaps two (2) calendar years from the date of the SPAC’s IPO (or as may be specified in the SPAC’s charter); direct negotiation with the SPAC regarding the target’s valuation (rather than relying upon conflicting valuations by market pundits); inclusion of financial projections in disclosure materials (which may not generally be included in the SEC Form S-1 of an underwritten IPO).

 

  • Disadvantages to the target private entity of entering into a business combination agreement with the SPAC, rather than attempting to achieve an IPO on its own may be: expectations to retain more post-business-combination rollover equity (which may be subject to certain restrictions on an immediate sale); lack of interest in trading the shares of the post-business-combination entity because of heavy shareholder redemptions; no reverse-breakup fee or other remedy for buyer breach, since the SPAC cannot use funds in the trust account to pay such a fee; possibility of receiving significantly less cash than the target would get in an acquisition by a private equity fund; uncertainty as to the amount of cash that will be available at the closing of the business combination due to shareholder redemption rights (unless there may be a “minimum cash” or “available cash” condition precedent in the business combination agreement, so if there is insufficient cash, the business combination will not occur due to the condition precedent, or by raising additional financing, perhaps through a PIPE agreement to sell shares to sophisticated investors that provides funds contemporaneously with the closing of the business combination).

 

  • “de-SPAC” is the name given to the process that commences once a SPAC finds a target private entity that the SPAC will attempt to acquire through execution of a business combination agreement.

 

  • Also after completion of the SPAC IPO, the SPAC may benefit from classification as an emerging growth company (EGC) as outlined in 2012 through the exercise of special privileges, such as: deferring compliance with certain changes in accounting standards; using Rule 163B of the 1933 Securities Act to engage in oral or written “test-the-waters communications”, with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs); having less-extensive narrative disclosure requirements (particularly in the description of executive compensation) than are imposed on other reporting companies; not being required to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b); providing audited financial statements for only two (2) fiscal years, whereas other reporting companies must provide audited financial statements for three (3) fiscal years.

 

  • The EGC special privileges will only last until the earlier of: the last day of the fiscal year following the fifth anniversary of the SPAC IPO, in which the SPAC had gross revenues of more than one billion seventy million ($1,070,000,000) billion dollars or in which the value of common equity held by non-affiliates of the SPAC exceeds seven hundred million dollars ($700,000,000); or, the date by which the SPAC has issued more than one billion dollars ($1,000,000,000) in non-convertible debt securities within the past three (3) years; or, becomes a “large accelerated filer”, as defined in Rule 12b-2 of the 1934 Securities Exchange Act.

 

  • Once the business combination is completed, the former target private entity will have EGC status for only as long as the remainder of the SPAC’s five (5) years of EGC status – so for example, if it took the SPAC one year after gaining EGC status to combine with the target private entity, once combined, the former target private entity would only have EGC status for four (4) years.

 

  • There may be at least four (4) generally-identifiable phases of a de-SPAC, encompassing the time between the informal outline of the deal to the closing for the transaction, and there is no way to predict with certainty exactly how long the process may take.

 

  • The first phase of the de-SPAC may include all the back-office background preparation necessary to get to the point of completing due diligence, possibly including such tasks as:

 

  • negotiating the letter of intent (LOI) to begin the process (as formal notification from the SPAC to the target that the SPAC is interested in acquiring the target), outlining generally the important terms of a proposed business combination agreement (such as: confidentiality restrictions; exclusivity restrictions; general structure of the transaction; indemnification; limitation of liability; price and any other consideration; timeline; and the like); most of which will be non-binding on the parties, with the general exceptions such as confidentiality, exclusivity (no negotiations with third parties for some period of time), indemnification, limitation of liabilities, and the like.

 

  • drafting the business combination agreement (also sometimes called the merger agreement);

 

  • unless there is concern about triggering a change of control or some similar provision under one or more of the target’s material agreements (such as debt financing facilities), or some concern about material tax consequences, the proposed business combination may occur, for example, between the target and a wholly-owned SPAC merger subsidiary, in which the SPAC would become a passive holding company and the target would be the survivor of the business combination and a wholly-owned operating company or intermediate holding company;

 

  • business combination agreements involving SPACs may not necessarily include any requirement for the target to prepay the target’s existing credit facilities, and may either not refer to the target’s credit facilities at all, or may contain a general covenant requiring the target to comply with whatever may be the terms of its credit facilities and to maintain the credit facilities in effect, since the business combination may be structured so that it does not violate the any change-of-control or no-fundamental-change event of default in the target’s credit facilities, or any negative covenant that may be triggered by the business combination (but even in such cases, lenders may waive such requirements if they may choose to do so); 

 

  • however, if the SPAC may wish to acquire the target fully or partially debt free, or may wish to use the target as a source for additional funds, the SPAC may structure the business combination agreement to require that the target: do a split-off or carve-out entity to address certain junk debt or release of liens; pay off all (for example, to liquidate the debt on a target revolving line of credit, but without discontinuing such line of credit) or some of the target’s debt; purposely incur additional indebtedness (for use in the business combination); provide covenants, guarantees, representations and warranties, to bolster the ability of the business combination to incur more debt;

 

  • because of potential shareholder redemptions, the amount available to the SPAC in the transaction may be uncertain, so the business combination agreement may provide some flexibility in terms of the consideration, allowing the purchase price generally calculated on “cash free/debt free” basis (structuring the sale of a company so that the buyer will not assume any of the seller’s debt, and will not get to keep any of the seller’s cash), with a post-closing true-up (a payment made post-closing to adjust for any difference between the purchase price – as determined on the closing date, based on estimated financial metrics – and the actual purchase price – determined using financial metrics that become known only after the closing date), rather than fixed purchase price per share;

 

  • escrow arrangements and earnouts (a post-closing purchase price payment that is contingent on the acquired business satisfying negotiated performance goals post-closing) are also common hedges used to adjust for valuation fluctuations;

 

  • consideration for the shareholders in the target private entity may be a combination of cash and “rollover equity” (when equity shareholders in the target private entity invest some portion of their proceeds from the sale into the equity of the acquiring entity), but in return may require a “minimum cash” condition (a requirement for the SPAC to have a specified minimum of cash on hand at the time of the closing) and committed acquisition financing, including executed subscription agreements for any simultaneous PIPE investments;

 

  • the business combination agreement may not necessarily have a “fiduciary out” provision (allowing the target the right to terminate the transaction if a better offer is accepted by the board pursuant to the board’s fiduciary duties);

 

  • due to the uncertainties for the ability to enforce representations and warranties, and the negotiations around the survival of representations and warranties, the cost for specific representations and warranties insurance may be negotiated into the business combination agreement, contingent upon the conditions allowing recourse to any escrow;

 

  • a reverse break-up fee (also called a reverse break fee or reverse termination fee – a fee paid by the buyer to the seller, in the event the buyer is unable or unwilling to close the transaction) is generally not included, nor is any reimbursement to the target for the target’s expenses involved in preparing for the transaction;

 

  • conducting “testing-the-waters” (TTW – designed to help a management team determine whether they should endeavor to raise capital from the public equity markets, by receiving feedback from institutional accredited investors – IAIs – under Rule 501 of the Act and qualified institutional buyers – QIBs – under Rule 144A of the Act) meetings to gather information about potential investor enthusiasm for the deal;

 

  • wall-crossing (in which the publicly-listed company tries to close large pre-arranged stock sales to QIBs through confidential offerings ahead of a public announcement of the public offering, once the QIBs have executed non-disclosure agreements that allow them to "cross the wall" between being an outsider and an insider, thus participating secretly in what is essentially a private placement) endeavors by the SPAC management;

 

  • laying the foundation for a potential private investment in public equity (PIPE) transaction (an alternative to traditional forms of financing, typically marketed by the SPAC placement agent to IAIs through wall crossing, to provide an extra source of capital) if the SPAC management determines that too many shareholders may redeem their shares, thus jeopardizing the funds the SPAC management may feel are required to consummate the transaction;

 

  • commence preparation of the tasks required to facilitate the eventual proxy vote;

 

  • execution of the LOI;

 

  • commence due diligence (so the SPAC could become familiar with the internal workings of the target, and with any problems that might be inherent in the target, including legal review, tax review and accounting review of the target by the SPAC, and a business valuation, done by an independent third party), and conversely, the target private entity should perform as much due diligence as possible on the sponsor entity for the SPAC and the SPAC itself;

 

  • the management of the target private entity should also do “roadshow” presentations for the SPAC sponsor entity, investor meetings and potential PIPE investors;

 

  • when the target private entity is performing due diligence on the SPAC in preparation for the possible business combination, the management of the target private entity must carefully consider that due to the relatively short existence of the SPAC, information that could assist the target private entity management in making an informed decision about whether to enter into a business combination with the SPAC may be difficult to obtain, due to the SPAC’s relatively short existence, such as: although part of any due diligence exercise must be contingent liability – potential liability that may be related to a potential business partner – most notably any litigation in which a potential business partner may be engaged at some future point during the business combination, the target private entity may find this issue very difficult to investigate, due to the SPAC’s short business history;it may also be difficult to find any historical data about the past operations of the SPAC, since it would be a relatively new entity, and similarly, data about the management group of the SPAC sponsor entity, consisting perhaps of individual sponsors, directors, officers, affiliates and institutions – such as investment banks and underwriters – may be available, but such data would be about the operations of such people and entities in different contexts from the SPAC, again because the SPAC would be a new entity, and so they would not have much of a track record in the management of the SPAC; the management group of the SPAC sponsor entity may much smaller than the management team for the target private entity, and once the business combination is effectuated, the former target private entity management team will likely be running the operations of the combined entity, so to avoid being totally subsumed by the management of the former target private entity, the SPAC sponsor entity management group will expect some representation on the board of the combined entity, and thus it will be important for the target private entity management to request the names of the SPAC sponsor entity management group’s proposed directors, and to have extensive discussions with them in an attempt to determine how the philosophies of such proposed directors may (or may not) align with the existing business culture of the target private entity management.

 

  • complete due diligence.

 

  • The second phase of the de-SPAC may include the tasks necessary to formalize the transaction, such as:

 

  • execution of the business combination agreement;

 

  • once the business combination agreement has been executed by all parties: any private investors in public equity (PIPE) will receive their public shares; any SPAC shareholder who elected to redeem their shares will receive their ratable share of the amount in the trust account immediately prior to the business combination; the post-business-combination company will be allowed to trade as a publicly-listed company; the sponsor’s promote shares will convert into the public shares (although they will usually remain subject to a lockup – a time period during which such shares cannot be sold – until generally the earlier of one year after the de-SPAC or the achievement of an agreed price increase and maintenance target); the target’s original shareholders may hold a majority of the public shares following the de-SPAC (since a SPAC may merge with a target that is much larger than the acquiring SPAC).

 

  • any cash proceeds of the SPAC IPO will be placed into an interest-bearing trust fund account, to be invested in low-risk assets and until the SPAC undertakes a definitive business combination; such trust funds may only be used for certain specific purposes (such as paying taxes), and definitely may not be used to pay for the SPAC’s search for a target. 

 

  • each SPAC IPO share has a right to receive a ratable share of the trust fund assets upon a redemption of such SPAC IPO share, which redemption will occur if either the SPAC is unable to consummate any business combination within the time period specified in the SPAC charter (or as may be extended by vote of the SPAC shareholders), or at the election of an individual shareholder at the time of a business combination, or at the time of a shareholder vote to extend the deadline to consummate a business combination, and since the redemption right is a right to receive a ratable share of the trust fund assets, any fluctuation in the SPAC IPO share price during the period between the SPAC IPO and the de-SPAC does not affect the redemption value of that share. 

 

  • announcing the deal to the public through a conference call, interviews with key executive of both entities in trade publications and press releases;

 

  • filing the SEC Schedule 14A proxy statement (or Schedule TO, if the SPAC wished to conduct a tender offer);

 

  • filing an SEC Form S-4 proxy financial statement (including: audited financial statements from both entities; comparative per share information, including pro forma per share data; debt financing related to the SPAC; description of the post-closing entity and how it will function; historical financial information for both entities; managerial discussion and analysis statements from executives of both entities discussing their aspirations for the deal; the prospectus for the transaction) if the SPAC intends to register new securities as part of the transaction;

 

  • The third phase of the de-SPAC may occur during the extended time period required accomplish the administrative tasks prior to finalizing the transaction, such as:

 

  • the SEC review period may take weeks or months, depending on the complexity of the deal, the accuracy and clarity of the materials provided to the SEC in the S-4, and the resulting number of questions asked by the SEC examiners;

 

  • during this time, the SPAC and target should cooperate on issues such as: developing a marketing plan; hiring a proxy solicitor to administer all the shareholder voting that may be required to approve the transaction; setting milestone dates for sending the proxy flyers to all known shareholders – generally at least three (3) weeks prior to the date set for the actual proxy vote – and for the actual proxy vote itself;

 

  • a SPAC will be considered to be an “ineligible issuer” (since it is a shell company), for three (3) years following the completion of the completion of the business combination, so it cannot use a “free writing prospectus” – which, pursuant to Rule 405 and Rule 433 of the 1933 Securities Act (Act), may be generally: any written communication that must be filed with the SEC prior to dissemination and which constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering– or in the case of a WKSI, whether or not such registration statement is filed – and is made by means other than: a prospectus satisfying the requirements of Section 10(a) of the Act; or, a written communication used in reliance on Rule 167 and Rule 426 of the Act; or, a written communication that constitutes an offer to sell or solicitation of an offer to buy such securities that falls within the exception from the definition of prospectus in Section 2(a)(10)(a) of the Act; or, a written communication used in reliance on Rule 163B of the Act – and so, any “roadshows” (a series of phone calls, web presentations, or meetings in different cities in which top SPAC executives have the opportunity to interact directly with current or potential investors, trying to convince such investors to purchase shares in the SPAC, perhaps using verbal presentations and informal “pitch decks” that must be collected by the presenters at the end of the presentation) by a SPAC must avoid anything involving permanent written communications by the SPAC which would then change the classification of the presentation in the roadshow to a free writing prospectus, causing the SPAC to be in violation of the applicable SEC Rules; Rules 165 and 425 allow the SPAC to do taped presentations, providing that the scripts for the presentations and all associated promotional materials are filed.

 

  • SPAC shareholder approval will be required for any proposed business combination between the SPAC and the target private entity, and following the public announcement of the proposed business combination, the SPAC will offer SPAC public investors an election either to redeem their common shares for their original purchase price, plus interest, or to sell their common shares to the SPAC in a tender offer;

 

  • if enough investors elect to redeem their shares, that might create a shortage in the amount of cash available to the new combined business after the business combination, so many SPACs use the risk mitigation strategy of issuing new securities to institutional accredited investors (IAIs) in a private investment in public equity (PIPE) transaction that is contingent upon the actual closing of the proposed business combination.The capital raised in the PIPE transaction generally will be used to provide additional capital for the resulting combined operating company to use, following the closing of the business combination;

 

  • SPAC investors may purchase “units” of the SPAC IPO on the first day of trading for the SPAC IPO, for some nominal price of perhaps ten dollars ($10.00) per unit, each of which generally consists of one SPAC IPO common share and one whole or fractional warrant but – if fractional, then perhaps between one-fifth (1/5) to one-half (1/2) of a share – to purchase that share at a certain price – typically about fifteen percent (15%) above the SPAC IPO share price – before a particular expiration date, although individual shares and warrants may not become available for trading until fifty-two (52) days after the date of the SPAC IPO, and warrants will become “detachable” (a derivative from a security, giving the holder the right to purchase the underlying asset at a specific price within a certain time) from the shares relatively soon after the SPAC IPO, and once you decide to split, only the individual share and warrant remain, the original unit disappears; 

 

  • since shareholders are permitted to vote in favor of a business combination while also electing to redeem shares, if the sponsor entity holds enough voting shares to approve the business combination on its own, a majority of the SPAC’s shareholders would be required to authorize the SPAC’s entry into the business combination, even though the sponsor entity is required to vote its shares in favor of the business combination; 

 

  • after filing the S-4, executives of both entities should embark together on an extensive roadshow tour, to familiarize investors in various cities about the deal;

 

  • responding to any questions or requests for information from the regulatory examiners;

 

  • once all issues identified by the regulatory examiners, and perhaps at least two (2) to five (5) calendar days prior to the date of the proxy vote the SPAC may tally all the anticipated redemption requests from the SPAC shareholders, attempting to determine the impact of such redemptions on the overall transaction (at which point the executives could make a final decision about the necessity for the PIPE financing noted in the first phase, above);

 

  • organize an analyst day (in which both entities invite , and may allow those financial professionals to achieve a greater insight regarding the possibilities of success for the deal);

 

  • any necessary renegotiations (perhaps caused by changes in the financial conditions of either party, or changed market conditions) for the business combination agreement must occur prior to closing, and may include incentives to consummate the closing such as: the sponsor entity of the SPAC might forfeit some founders’ shares; incentives to decrease redemptions; the target private entity may agree to waive the minimum cash closing condition or may accept equity instead of cash, in exchange for amendments to the business combination agreement that would favor the target private entity;

 

  • The fourth phase of the de-SPAC may include all the tasks required through closing the transaction, such as:

 

  • holding the proxy vote;

 

  • filing a super 8-K form with the SEC bearing the new name assigned to the new entity (the SPAC may just change its name to the name of the target);

 

  • complete the closing.

 

  • If the SPAC does complete the business combination with the target entity within the time period specified in the SPAC’s charter (or as may be extended by the vote of the SPAC shareholders), then the SPAC ceases to be a shell company (often referenced as a “de-SPAC”), becomes a publicly-traded company listed on an exchange, and as such must comply with all the listing rules of such exchange.

 

  • The SEC requires a new SPAC entity to file a super 8-K form (which is the combination of information from an SEC Form 8-K and an SEC Form 10 registration statement), within four (4) business days after the de-SPAC; the new entity may not use SEC Form 8-S to register any management equity plans until sixty (60) calendar days after the final completion of the business combination.

 

  • Under Rule 144 of the Act, SPAC shareholders generally cannot resell shares until the SPAC: files current SEC Form 10 information; one calendar year after completing the business combination and filing the super 8-K; and, files the periodic reports required by Section 13 or Section 15(d) of the 1934 Securities Exchange Act for the prior twelve (12) months.

 

  • Within three (3) calendar years after the business combination, once ineligible issuer” status has expired, a SPAC may become a “well-known seasoned issuer” (WKSI) – an issuer that meets all of the following requirements at some point during a sixty (60) day period preceding the date the issuer satisfies its obligation to update its shelf registration statement (generally the date of filing its SEC Form 10-K or SEC Form 20-F), including: eligibility to register a primary offering of its securities on SEC Form S-3 or SEC Form F-3; and, it must have had an outstanding minimum seven hundred million dollars ($700,000,000) in worldwide market value of voting and non-voting equity held by non-affiliates or have issued in the last three (3) years at least one billion dollars ($1,000,000,000) aggregate amount of non-convertible securities other than common equity, in primary offerings for cash, not exchange; and, must not be an ineligible issuer – the main advantage of which is that the filing by a WKSI of a shelf registration statement on SEC Form S-3 is automatically effective and as such is not subject to the SEC review process.

 

  • Although a SPAC may rely on Rule 134 of the 1933 Securities Act as a potential safe harbor involving communications by a SPAC announcing an offering, for the first three (3) years after the business combination, a SPAC is not allowed to use many “gun-jumping” (offers made by a WKSI before filing a registration) communications safe harbors (such as in Rules 137-139, and the Rule 163A restriction on communications made more than 30 calendar days prior to filing a registration) afforded by Rule 163 of Act to avoid penalties for unauthorized actions, although all such restrictions expire three (3) calendar years after the completion of the business combination.

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