Appleby Hong Kong Partner David Bulley and Cayman Islands Senior Associate Dean Bennett recently wrote about the increasing attractiveness of special purpose acquisition companies (SPACs) and the use of Cayman Islands exempted companies in these types of structures. Clients and contacts were interested in learning more about SPACs generally and enquired about their use in each of the jurisdictions where Appleby practises law. In this global article, we revisit the basics, then look to each of our key jurisdictions for specific trends and insights.
SPACs, also known as "blank cheque companies," are re-emerging as a powerful alternative to traditional IPOs in the current volatile market. Dealogic reports that in 2019 SPACs raised a record $13.4bn in proceeds. The trend has continued in 2020, in spite of (or perhaps because of) the market disruptions caused by Covid-19. According to Barrons, SPACs are on pace for another record year, having already "raised more than 75% of 2019's record total". Not convinced? Consider this: It was reported in the media in July 2020 that Bill Ackman's blank cheque company, Pershing Square Tontine Holdings, had raised $4 billion for its IPO, the largest SPAC in history to go public. It did so at what may prove to be the nadir of Covid-19 related market uncertainty.
Why the sudden enthusiasm for SPACs? The markets were once enamoured with the notion of blank cheque companies; they provided an alternative route to the public markets which was particularly attractive to entrepreneurs in the technology industry; they were perceived as more democratic in that they are not restricted to institutional or sophisticated investors; and they were often less expensive than a traditional fund structure. However, critics felt that they were extremely risky for investors, and those doubts proved founded in some well- publicised cases of fraud. Now, in times of commercial uncertainty, the idea of a blank cheque company with a large war chest and a skilled management team poised and ready to identify profitable targets and move on them quickly has undeniable appeal. Many investors who have shied away from market volatility are experiencing "fear of missing out". SPACs offer the promise of being back in on the action when the time is right.
Appleby has the expertise and experience to assist with all stages of the SPAC life cycle, from the initial formation and listing to advising on the business acquisition and de-SPAC.
What is a SPAC and How is it Structured?
SPACs are companies that are formed to raise capital through an IPO to fund a strategic acquisition down the road, typically within 18 to 24 months.
The IPO will typically consist of "units" comprised of shares and warrants (representing the right to acquire additional shares) in the SPAC. The sponsor will retain a minority ownership interest in the SPAC (typically around 20%) to make sure they have "skin in the game", with the sponsor's founder shares granting exclusive board appointment and removal rights during the period prior to the first business combination and "de-SPAC". Warrants or long-term call options at a fixed price may also be separately issued to incentivise the management team.
The SPAC will have described in its offering documents the sector into which it is seeking to invest. The technology and energy sectors remain popular. The management team of the SPAC will be, or will be supported by, experts in the identified sector who are tasked with finding the right target for the business combination. Since the target is usually unidentified at the offering stage, and therefore not subject to the usual due diligence that an investor would undertake before deciding to buy shares in the ordinary fashion, confidence in the management team is key. Arguably, the investor is investing in the management team itself, rather than the company, as the success or failure of the venture will rest on the management team identifying the right target. There are, however, a number of protections built into the structure for the public investors which may include:
- a requirement for the SPAC to conclude its first acquisition within a stated timeframe, typically within 18 to 24 months depending on the rules of the stock exchange on which the SPAC is listed;
- a right for investors to approve the proposed investment once it is identified and/or a right for investors to have their shares redeemed or repurchased by the SPAC and exit the structure;
- a requirement for the IPO proceeds to be held in a segregated trust account (see the section headed "The Trust Account" below);
- minimum deal value requirements (e.g. where the SPAC is listed on the NYSE, the SPAC must complete one or more business combinations having an aggregate fair market value in excess of 80% of the assets held in the trust account); and
- independent valuation requirements where the target is affiliated with the sponsor or management team.
If a business combination is not concluded within the specified time period, the SPAC will be liquidated and the proceeds held in the trust account will be returned to the public investors. Sponsors do not participate in this capital return and are subordinated to the public investors.
The Trust Account
After setting aside a portion of the funds to meet the listing expenses and the SPAC's ongoing operational costs, the bulk of the IPO proceeds are segregated in a trust account with a third party financial institution. The funds in the trust account may only be released in specific predefined circumstances, namely upon the earlier of the closing of the first business combination or the redemption of investors' shares in the event that the SPAC is unable to complete an acquisition within its stated term.
The Listing
A SPAC IPO is perhaps best described as "an IPO of a company to be named at a later date". Popular SPAC listing venues include the NYSE, NASDAQ, and the LSE's Main Market and AIM. See the section on Bermuda for a listing on the Bermuda Stock Exchange and the section on the Crown Dependencies for a listing on The International Stock Exchange. The listing process for a SPAC is generally quicker and more straightforward than listing an operating company. However, the lack of an operating history and business will limit the types of listing available (e.g. a SPAC is unable to obtain a premium listing on the LSE's Main Market).
The "de-SPAC"
The method used to acquire the target business will depend on the identity of the target itself, but will commonly be affected by way of a merger, stock/share exchange, asset acquisition or other similar business combination.
The SPAC may raise additional funds to help fund the business combination, including through borrowings under loans or bond issuances, further share and warrant issues or a combination of the foregoing.
After the company 'de-SPACs' and becomes a normal operating company, the business continues to operate as a publicly listed company under the rules of the relevant stock exchange and any securities commission or similar authority having jurisdiction, with the management team working to create value for investors and the sponsor.
Originally published by Appleby, 13 August 2020
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.
