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Benefits
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![]() | Access to capital and potential to sell a bigger stake in the company
SPACs give private companies access to public markets, particularly during times of market instability, and help open the door to permanent capital. A SPAC raises capital through an IPO prior to acquiring a private company target. If it needs additional capital to complete the transaction with the private company target, it may raise funds through various vehicles, including a private investment in public equity (PIPE).
Additionally, SPAC transactions typically allow private company owners looking for an exit strategy a chance to sell a larger stake in a company than might otherwise be possible in a traditional IPO.
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![]() | Greater market certainty
Missing the right pricing “window” can have a significant impact on the success of a company’s traditional IPO. With SPACs, target companies can negotiate a “locked in” price of their stock with the SPAC sponsor as part of their agreement and avoid the potential valuation hit that can happen with traditional IPOs in times of market volatility.
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![]() | Flexible deal terms
In addition to the ability to negotiate the sale price of the company to the SPAC, SPAC transactions provide flexibility to negotiate other parts of the deal. For example, if investors decide to withdraw their capital before the acquisition closes, SPAC sponsors might agree to fund any cash shortfalls at the time of closing.
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![]() | Access to experienced managers
Partnering with a strong sponsor may allow a private company target to benefit from its resources and experience. A seasoned sponsor may help when additional capital is needed. It may also tap into its network to build a strong management team for the target.
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Challenges
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![]() | Potential for increased cost
The “units” issued as part of the SPAC’s IPO consist of a share of common stock and a fraction of a warrant to purchase common stock that becomes exercisable after the de-SPAC transaction is completed. With the dilutive nature of the warrants, the economic cost of a SPAC transaction may exceed that of a traditional IPO.
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![]() | Possible loss of control
The private company and its owners may lose some control as the SPAC sponsor may negotiate representation on the board of directors and more active involvement in the post transaction company.
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![]() | Public company readiness
When a target company and a SPAC sign a merger agreement, it triggers the need for certain SEC filings that the SPAC must complete within a specified time period. While the shorter window may mean the private company becomes publicly traded sooner, the set deadlines may place a high burden on the private company and its management team since much of the information in the SPAC filings is that of the private company. Alternatively, a company intending to go public through the traditional process sets the timing for its IPO. This means a company going public via a SPAC will likely need to meet an accelerated public company readiness timeline when compared to a traditional IPO for substantially the same preparation, due diligence, prospectus drafting, and SEC engagement and oversight, including the following.
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![]() | Accounting and reporting complexities
A de-SPAC transaction may result in a change in control. Determination of whether the target or the SPAC is the accounting acquirer may require judgment and can lead to different accounting models.
Pro forma financial information will typically be required to provide a comprehensive view of the de-SPAC transaction, including multiple redemption scenarios.
Additionally, a de-SPAC transaction typically requires multiple steps of legal or equity restructuring that could have tax implications.
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Warrants
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The SEC staff recently issued a statement that highlighted certain features in SPAC warrants that may result in the warrants being classified as liabilities (rather than equity) and remeasured to fair value each reporting period through the income statement. To the extent SPACs have not appropriately considered the accounting for warrants, they may need to correct their financial statements, possibly slowing down the IPO or merger transaction.
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- John Coates, Acting Director, SEC Division of Corporation Finance
Benefits
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![]() | Protective rights and additional profit opportunities for early investors
The capital raised by the SPAC from investors is placed into escrow and earns a small amount of interest while the SPAC sponsor searches for a target. Investors in the SPAC IPO also receive warrants in the SPAC as part of the units purchased, enabling them to participate in the upside, something later investors do not receive.
If the SPAC sponsor is unable to find a target company in the allotted time frame, or if investors are unhappy with the chosen target, shareholders may redeem their original investment.
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![]() | Ability for some investors to get in on the ground floor
SPACs offer individual retail investors a chance to participate in a private company going public. In a traditional IPO, companies raise money from institutional investors and retail investors may miss out on the chance to participate. With a SPAC, anyone can buy in since the SPAC often trades publicly before a deal is even announced.
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![]() | Voting rights
While investors in the SPAC IPO cannot choose the target company, they can choose to either vote in favor of the target selected by the SPAC sponsor or vote against it. This ability to have input differs from the structure often used in a venture capital pool where investors place their money in a “blind pool” to be invested at the sole discretion of the venture capital group.
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Risks
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![]() | Potential for increased cost
The primary source of a SPAC’s potentially high cost is the dilution inherent in the SPAC structure from:
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![]() | SPAC sponsor
Since most target companies are not identified until later, early investors are investing in and relying on the sponsor, not on the to-be-identified target company. But SPAC sponsors can have conflicts of interest and their economic interests in the SPAC may not align with investors. The sponsor can turn a significant profit, regardless of how well the company does after it acquires a target.
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![]() | Quality of the target company
The SPAC transaction relies heavily on the sponsor, who is incentivized to identify a target company and close an acquisition. Given the time constraint placed on a sponsor to find a target company within 18-24 months, the sponsor may need to accelerate the timeline to find a company to acquire. Additionally, as the SPAC space is becoming increasingly crowded and competitive, the ability to identify viable target companies is becoming more challenging. Investors might find their money going into a merger with a lower quality target company that is not initially as fully prepared to become a public company.
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