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 entity.
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 range.
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 present.
The author would like to thank Markus Liik, articling student, for his assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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