Special Purpose Acquisition Companies (or SPACs) have dramatically increased in use as a viable method for taking companies public over the last decade.
In many cases, the advantages of a SPAC outweigh the downside risks. In addition, the features of these types of investment vehicles provide opportunities to investors and target firms in reverse merger transactions above their traditional reverse merger peers.
If you plan on using a SPAC, you must not be a penny stock to avoid Rule 419 which prohibits trading.
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This means you must raise at least $5,000,000 net of all fees and expenses, including those paid to the promoters as allowed, and you must prove more than a $5 trading price, which in almost all cases requires an underwritten offering. What’s listed below is a brief intro into some of the advantages of using SPACs as a manufactured public company in a reverse merger–from both the perspective of investors and target firms.
Funds in Escrow–Because investors’ entire lump sum is placed into escrow immediately (and earns a small amount of interest while in anticipation of a merger), the downside risk is significantly eliminated.
In a worst case scenario, a deal never materializes and the investor fails to earn the market’s 5% to 10% return, but instead only receives a few points above zero. Still, for the potential upside possibility when a good merger candidate does come along, the risk seems well worth it, given the downside is fairly protected.
Tradable Stocks & Warrants–Investors in SPACs can trade both their stock and warrants during and after the interim stage while awaiting a good target company to merge -in.
The stock in such a potential reverse merger deal with a SPAC will typically dip a bit due simply to the fact that expenses incurred in the process of manufacturing the SPAC have put a drain on the shell resources.
However, between the time the SPAC is created and anywhere thereafter an investor can effectively sell his/her stock.
When a deal is announced often the stock will tick back to the value prior to the merger announcement. Such an investor could sell his/her shares, avoid the loss by selling them at cost and then maintain holdings in the warrants, which could still potentially produce good returns in the event that there is upside in the deal. It can be a win-win-win.
Time Limitations–In SPAC scenarios, there is never an open-ended time allotment to consummate a transaction.
There is always a limit, forcing the SPAC team to find a target in a specified period of time (say two years).
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While there still is lock-up and illiquidity for a time until the merger occurs, it’s still limited and means investors can be sure that if a deal is never agreed-upon between management and investors, then the initial funds are returned.
Greater Input–Unlike a venture capital pool where limited partners come in and place their money in a “blind pool” to be invested in solely by the VC fund management team, a SPAC allows for greater investor input into the investments themselves.
SPAC investors do not choose the deals, but they opt out of any target opportunity and receive reimbursement of funds. In addition, an investor has the ability to vote on any opportunity presented as a target in the reverse merger transaction. In short, perhaps the greatest advantage from an investor’s perspective in a SPAC deal is the ability to have a say (yeah/nay) in the investment decision–a feature that differs greatly from the blind pools of the venture capital world.
Deciding on a SPAC over a traditional reverse merger, self-filing or traditional IPO requires an in-depth understanding into the SPAC world and some of the key advantages to a target company in a SPAC reverse merger transaction.
Quicker & Cheaper–We said it before, but reverse mergers are nearly always cheaper and faster than IPOs and SPACs have even greater advantages than a traditional reverse merger.
Why/when to IPO
In a typical SPAC transaction, the money has already been raised by the underwriters (often in the form of a PIPE), so negotiations with underwriters are often unnecessary.
No IPO “Window”–In a traditional IPO, timing is everything and missing the right “window” can mean the difference between a successful “pop” and a failed IPO–at least by some standards.
The very definition of a SPAC plays well to the IPO window being somewhat closed.
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The SPAC market is almost always active and can be even more so when the IPO window has been closed by financial instability or macro shocks. The risks of failure to raise the capital through institutional investors or changing the price of the offering are all eliminated as these are done when the SPAC’s money is raised and placed for holding into the investment vehicle.
It’s already been done.
Knowledgeable Management–In a SPAC merger, the management team will often retain at least one key person for an active role within the company or on the board as a key consultant.
This mitigates the risk of the company failing to meet investor objectives after any key deal is consummated.
No Threshold for IPO— Because many smaller companies may not qualify for an IPO in the traditional sense (see NASDAQ listing requirements), a SPAC is a good alternative for companies that may not make the cut, but that may still have large potential growth prospects.
SPACs Have Cash–Unlike most other non-performing shell corporations, SPACs typically have cash.
In most cases, the cash in a typical SPAC will be less than $5 million, but the money is helpful to create immediate capital appreciation and value for the target in the transaction.
They’re Squeaky Clean–Because SPACs lack the tainted history of many previously-reporting companies in a reverse merger transaction, there is no drama, cost and headache of cleaning a previous shell corporation.
A manufactured shell insures complete control over the cleanliness of the shell and its past history.
Working with a SPAC often means the target entity maintains many of the benefits of self-filing, but without the benefit of a capital-raising event. In addition, a SPAC transaction is typically more rapid than a self-filing and typically comes with more experienced management and industry professionals to assist in the ultimate success of the deal.
There’s ultimately less “do-it-yourself” in working with a SPAC. However, you decide to go public, there are a myriad of options in each scenario. Some options–while they may make sense for a majority of cases–simply will not fit within the confines of your particular situation.
Each deal opportunity presents different opportunities, challenges and nuances.
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Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors.
He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck.