A dozen years after being embraced in the US, and six years
after the TSX adopted rules governing its use, the Special Purpose
Acquisition Corporation (SPAC) has finally arrived
in Canada. This year, four SPAC initial public offerings
raised almost $1 billion on Canadian markets, and two more recently
entered the fundraising stage. With their popularity surging,
Canadian investors ought to understand the benefits and risks
associated with this unconventional investment vehicle.
An SPAC is a shell company that raises money through an IPO,
then searches for a private company to acquire and bring to market.
Upon the closing of the initial offering, the investors' money
is put in escrow and invested in treasury bonds until management
finds an appropriate target. According to TSX rules, an SPAC has 3
years to make an acquisition before it must be liquidated. Once a
target is found, management needs majority shareholder approval
before it can make the acquisition. Dissenting shareholders are
entitled to redeem their shares (with the accrued interest), and
frequently retain an option to participate in the post-acquisition
SPACs offers benefits to both investors and target companies.
Since the target is not known at the IPO stage, the investor takes
a view on the quality and judgment of the management team while
retaining the ability to ratify or opt out of the ultimate
investment. Retail investors have the opportunity to earn the level
of returns typical of private equity transactions without having
their money trapped in a "blind" investment.
The target companies, which are predominantly private, get
access to public markets while avoiding the effort, expenditure,
and scrutiny of a traditional IPO. Since SPACs can only raise money
on the strength of their leadership, the target will get the
benefit of an experienced management team with an impressive track
record. SPAC investments also fill a traditional gap in capital
markets, making private acquisitions in the $100 to $500 million
The primary drawback of a SPAC is its lack of diversification,
which stands in contrast to private equity funds that traditionally
spread their capital over multiple investments. TSX rules dictate
that a SPAC's ultimate acquisition must comprise at least 80%
of the equity raised, which ensures that all the proverbial eggs
are put in one basket. Investors should carefully consider the
management team behind the SPAC, and conduct additional diligence
when presented with the acquisition target.
SPACs are currently governed by Part X of the TSX Company Manual
rather than the provincial securities regulators. The TSX regime
has only recently been put to use and, consequently, the
application of many rules are far from clear. As more Canadian
SPACs come to market, investors and private companies should
educate themselves on the opportunities and dangers that they
The author would like to thank Markus Liik, articling
student, for his assistance in preparing this legal
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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