If 2020 was considered an extraordinary year in terms of special purpose acquisition company (SPAC) activity, with in excess of 200 listed SPACs generating gross proceeds in the region of US$80 billion, 2021 looks set to take this reinvigorated market tool to another level entirely. Already by May this year, there have been more than 300 listed SPACs generating gross proceeds of more than US$100 billion.
Why the popularity?
For sponsors, using SPACs is an effective alternative method of raising capital to then deploy by way of M&A deals or other types of business combinations (as opposed to launching a fund). It is conceivable that from the date of incorporation of the SPAC, a listing can be completed within just a few months. The stakes are certainly often higher for the sponsor (with a typical period of between 12 and 24 months to complete the business combination before capital is returned to investors) but there can also be greater reward, as compensation for the sponsor/management tends to be wholly dependent on the success of the business combination.
For investors, SPACs provide a flexible investment option (since the securities are listed, they are, in theory, at least, tradeable in the public market) with limited risk and certainty of return during the pre-acquisition phase, as the funds raised by the SPAC are held in a trust account and if the SPAC fails to complete an acquisition or the investor does not want to participate in one, they are returned to investors.
What is the role of offshore in respect of SPACs? And in particular, the Cayman Islands?
While the majority of US-listed SPACs are incorporated using Delaware corporations, a SPAC incorporated offshore (for example, in the Cayman Islands or BVI) 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. Using a Cayman Islands incorporated entity as the SPAC is a popular choice for various reasons, including the flexibility it provides (in terms of its constitution and corporate governance), tax neutrality, limited additional regulatory compliance requirements (ie over and above those of the relevant exchange) and familiarity of Cayman Islands vehicles (sponsors, investors and exchanges all tend to have a good understanding of Cayman Islands vehicles, which ensures the listing process to be as straightforward as possible).
What's next for SPACs?
SPACs are set to become a mainstay of equity capital markets. It is clear that as result of a surge in activity, increased regulatory interest is the first thing we expect to see, as has already been the case with the SEC in the US. However, based on current evidence, this does not seem to be dramatically slowing the tide of new deals. What it does mean is that sponsors and their advisers must be agile and up to date with all legal and regulatory developments.
The trend from 2020 into 2021 sees this area growing and it looks set to continue (notwithstanding increased regulatory scrutiny). The spectrum of types of sponsor has become broader (with fund managers and family offices now heavily involved in the space) and with that, there will be a wider range of investors as well as a wider range of business combination opportunities.
While in the Cayman Islands, we have seen a natural preference towards listing on Nasdaq (given many of the sponsors we work with are US-based), we are seeing increased interest in other markets, such as Amsterdam's Euronext. It is expected that activity in such alternative markets will see a surge during 2021 as sponsors look to access capital in other parts of the globe using this structure.
Our global experience of the SPAC market
Industry commentary from leaders in the market indicate that SPACs are here to stay. At Ogier, we are very much involved in this space, having worked on nine publicly announced Cayman Islands incorporated SPACs in the past year (including ARYA Sciences acquisition vehicles III and IV (with US$143m IPO and US$130 million IPO, respectively), Kismet acquisition vehicles Two and Three (US$230 million and US$287 million, respectively), ITHAX Acquisition Corp (US$240 million) and Aries I Acquisition Corporation (US$143 million), as well as two de-SPAC business combinations (ARYA Sciences acquisition vehicles I and II) and we are currently working on more than 20 other SPACs in the process of effecting their IPO, as well as a number of other de-SPAC transactions, including the Yunhong/Giga Energy business combination.
What Ogier brings to the table
Experience and insight. Focussed advice and prompt service delivery.
Because of our extensive current involvement in the space, we are seeing first-hand the legal and market developments in this area and are constantly updating and improving our documentation and advice for our SPAC clients. We are also extremely familiar with structuring these deals and understand the key challenges facing clients in respect of time to market (which is often an important driving factor).
The Cayman Islands offers one business day incorporation of exempted companies (the most commonly used vehicle) and having our in-house corporate services team (Ogier Global (Cayman) Limited) allows us the maximum amount of control when it comes to setting up the SPAC to ensure client needs are met in an effective, efficient and timely manner.
Once the SPAC is incorporated, we then work closely with onshore counsel and other service providers/counterparties to assist with finalising all relevant listing documentation, issuing required legal opinions, as well as dealing with all necessary corporate actions along the way (from incorporation, to closing of the IPO and then through to the eventual de-SPAC business combination).
Given our global network of offices in BVI, Cayman Islands, Guernsey, Hong Kong, Jersey, London and Luxembourg, Ogier is well-positioned to provide seamless cross-jurisdictional services to clients, wherever the target market may be situated.
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.