Six years ago, the TSX adopted specific rules governing the
listing of Special Purpose Acquisition Corporations (SPACs) in
response to the growing popularity of these investment vehicles in
the United States. However, SPACs have garnered little interest
north of the border, rendering these rules unused – until
now. On April 21, 2015, Dundee Acquisition Ltd. completed its
initial public offering of $100 million Class A restricted voting
units (each unit containing one Class A share plus half a purchase
warrant), making it the first SPAC to go public on Canadian capital
SPACs, also referred to as "blank cheque companies",
raise money through an IPO and then cast a wide net in search of a
private company to acquire. According to TSX regulations, a SPAC
has a maximum of 36 months after listing to complete an
acquisition. Funds raised, net of the underwriters'
compensation and a percentage withheld to cover working capital and
operating expenses (at most 10%), are held in escrow pending either
a successful acquisition or the liquidation of the SPAC at the end
of the 36-month period. Once a target is identified, majority
shareholder approval is required in order to proceed with the
acquisition/merger. If approval is obtained, the SPAC proceeds with
the transaction and a new, merged entity is formed. Dissenting
shareholders retain the option to redeem their shares on a pro-rata
basis of the amount held in escrow, typically recovering their
initial investment or more. Often, as is the case with Dundee
Acquisition, dissenting shareholders also remain entitled to any
share purchase warrants attached to the units, providing them with
a potential future interest in the merged entity. If, upon expiry
of the 36-month period, no acquisition is completed (either because
shareholder approval is not obtained or because no target is
identified), the funds held in escrow are distributed among the
shareholders on a pro-rata basis.
For certain target companies, merging with or being acquired by
a SPAC may provide an efficient alternative to a traditional IPO.
Companies looking for an easy exit and/or quick access to capital
can avoid the hurdles associated with accessing complex debt and
equity markets by pursuing the SPAC route. Furthermore, the SPAC
comes with significant capital, a broad shareholder base and an
experienced management team, all of which may appeal to a small
company that would otherwise find it too burdensome to access
public markets. Existing management can also remain focused on
running its business instead of pursuing a complicated public
Although SPACs may seem like a blind investment for investors,
their popularity is growing in the United States. This is mainly
because investors are given the opportunity to engage in
investments of a private equity nature with downside protection
should they disapprove of the ultimate acquisition. Investors are
putting their faith in the SPAC's founders, sponsor and
management, usually a team of experienced professionals with
established track records and with management and M&A
experience, to find a viable investment opportunity. These
parties' interests are typically aligned with investors through
their own financial commitment to the SPAC. Dundee Corporation,
which is the sponsor for Dundee Acquisition, purchased an
additional $4 million worth of Class B shares, ensuring it too has
skin in the game. Lastly, since both the shares and the warrants
are traded on public markets, investors may exit at any time by
selling their interest in the SPAC.
Despite the potential upside and investor protections, investors
should approach SPACs with guarded enthusiasm. SPACs investments
differ from private equity funds, which mitigate risk by spreading
their exposure among a portfolio of companies. In addition, SPAC
promoters may vary in expertise, having included the likes of
legendary football coach Lou Holtz and Apple co-founder Steve
Wozniak. Sponsors are also often flush with warrants, incentivizing
management to strike a deal for personal financial reward.
As with any investment, investors must perform proper diligence
when considering a SPAC investment – particularly given the
recent entry of SPACs to the Canadian market. Dundee has succeeded
in opening the door and paving the way for other SPAC IPOs, marking
a step forward in the maturity of Canadian capital markets.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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