Having seen an increased number of family offices and fund managers looking to be involved in special purpose acquisition companies (SPACs), Ogier's Bradley Kruger and Tommy Tuohy explain more about these formations and what's behind the current boom. This article first appeared on the Dart Real Estate blog.
The re-emergence of SPACs in the last couple of years shows no sign of slowing down as the demand for SPAC formations in the Cayman Islands continued to increase in the first quarter of 2021.
Moreover, increasingly diverse clients are looking to be involved in SPACs. At Ogier, we are seeing, among others, family offices and fund managers now taking part in SPAC transactions, whether in the form of setting up a SPAC as its sponsor, investing in a SPAC, or even selling a portfolio company to a SPAC.
Undoubtedly, one of the key attractions to set up a SPAC is that it affords a family office the opportunity to work with other investors to make large acquisitions that it would not typically be able to make on its own. From a practical perspective, one of the most important considerations for a family office looking to set up a SPAC is to ensure that it has an experienced and professional management team in place, as investors need to be confident that the management team will be able to identify and successfully acquire an appropriate target in the future.
What is a SPAC?
A SPAC is a derived form of what is known in the United States as a "blank-check company" – a company formed with no business purpose or undertaking other than to raise funds for some future undefined object.
A SPAC is formed by its initial sponsors for the purpose of raising funds through an initial public offering (IPO), which will then be used to buy an existing business. The money raised in the SPAC's IPO must be held in an interest-bearing trust account until a suitable target business is identified and then that money can only be used to fund the target's acquisition. The SPAC itself has a limited time in which to identify a target and complete its acquisition, usually between 18 and 24 months post-IPO.
If the SPAC fails to complete an acquisition by the applicable deadline, the funds raised in the IPO are returned to investors with interest. Investors also have the right to redeem their shares and receive back their original investment immediately before an acquisition takes place if they do not want to participate.
SPAC IPOs are structured as sales of "units" comprising both shares and derivative securities (usually warrants exercisable following an acquisition). The units initially trade as a single security, but later, usually 52 days after the IPO, their component securities are allowed to trade separately.
Popularity with investors
For investors, the redemption return on pre-acquisition SPAC shares offers a relatively attractive yield with minimal risk (given the security of the trust account and redemption rights). As pre-acquisition SPAC shares typically trade at a discount and carry the right to the accrued interest in the trust account, their pre-acquisition redemption yield is comparable to US Treasuries.
SPAC units though also carry features that give them clear advantages over Treasuries and similar hedges. As SPAC units will eventually separate into their component securities, this means that an investor may redeem his shares to receive back his investment prior to an acquisition, but may still keep his warrants or rights alive. Furthermore, this means, in effect, that units grant a free option to participate in the post-acquisition business, allowing investors both safety and a chance at the upside of any deal.
SPACs can certainly provide general investors access to investments in acquisitions, buy-outs and other types of investment transactions which might otherwise be restricted to private equity (PE) or venture capital (VC) funds. But those same funds themselves are now looking to use SPACs in their own strategies.
While the philosophy and goals behind a SPAC and typical PE or VC acquisition and management structure are not dissimilar, SPACs arguably have a number of key advantages over some of the traditional structures used by PE and VC firms for investment. For example, SPACs offer:
- Limited risk and certainty of return during their pre-acquisition phase – Investors have the security and certainty of the return liquidation from the funds held in the trust account if the SPAC fails to complete an acquisition or the investor does not want to participate in one.
- Greater liquidity – SPAC investors benefit from the liquidity of publicly traded securities and the ability to control the timing of an exit.
- High incentivisation – Pending an acquisition there is typically no cash compensation paid to the SPAC's management team.
- Additional leverage – Including additional securities such as warrants in SPAC units gives investors the ability to leverage their initial investment by enabling them to invest more capital at a pre-determined price (premium to the IPO price), even if the investor elects to receive back its capital in a pre-business combination redemption or tender offer.
Cayman Islands SPACs
While the majority of US-listed SPACs are incorporated using Delaware corporations, a SPAC incorporated in the Cayman Islands is often seen as an attractive alternative as it may offer a more efficient post-acquisition structure and remove any additional US tax, legal or regulatory implications that may arise simply as a consequence of using a US vehicle. The SEC and NASDAQ allow for rules concessions for non-US issuers which qualify as "Foreign Private Issuers" and for foreign entities to follow more flexible "home country rules".
NASDAQ and other leading US exchanges allow listings by SPAC entities formed in most of the leading offshore jurisdictions, including the Cayman Islands.
Cayman is a popular SPAC jurisdiction for several reasons, including:
- the suitability of Cayman company law to SPACs;
- limited additional regulatory compliance requirements;
- tax neutrality; and
- the close similarity between aspects of Cayman and Delaware company law – which allows for an easy translation of existing standard legal forms and investor understandings from one jurisdiction to the other.
SPACs in the Cayman Islands are typically incorporated in the form of exempted companies. US counsel (who lead the US listing process of the SPAC) and the US exchanges and authorities are very familiar and comfortable with Cayman-exempted companies and this assists greatly in making the listing process straightforward from an onshore perspective and is one of the key reasons why Cayman-incorporated SPACs continue to be very popular.
Ogier has extensive experience in advising on setting up Cayman SPACs, including acting for family offices on such deals. Notable SPACs that Ogier's Cayman office have recently advised on include:
- ITHAX Acquisition Corp on its US$241.5 million initial public offering on NASDAQ.
- ARYA Sciences Acquisition Corp IV, on its US$130 million initial public offering NASDAQ (Ogier has acted as counsel for Perceptive Advisors' previous three SPACs: ARYA Sciences Acquisition III raised US$130 million in August 2020 and announced its business combination with Nautilus Biotechnology in February 2021 – a transaction worth US$350 million; ARYA Sciences Acquisition II completed its acquisition of Cerevel Therapeutics in October 2020; and ARYA Sciences Acquisition underwent a US$253 million merger with Immatics Biotechnologies in July 2020).
- Kismet Acquisition Two Corp and Kismet Acquisition Three Corp – Kismet Acquisition Two raised US$230 million and Kismet Acquisition Three raised US$287.5 million and both trade on NASDAQ.
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.