Top 10 Practice Tips: PIPE Transactions By SPACs

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This practice note discusses 10 practice points that can help you, as counsel to a special purpose acquisition company (SPAC) or its placement agent...
United States Corporate/Commercial Law
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This practice note discusses 10 practice points that can help you, as counsel to a special purpose acquisition company (SPAC) or its placement agent, execute a private investment in public equity (PIPE) transaction alongside a SPAC business combination transaction. A SPAC is a public shell company that uses proceeds from its initial public offering (IPO) to acquire a private company within a designated timeframe. Following an announcement of a proposed business combination, the SPAC must offer its public investors the option to either redeem their common stock for the original purchase price or to sell their common stock to the SPAC in a tender offer. This redemption option inherently creates uncertainty as to the amount of cash available to the combined company following the initial business combination. SPACs often seek to mitigate the redemption concern by issuing new securities to institutional accredited investors in a PIPE transaction that is contingent upon the closing of the initial business combination. The capital raised in the PIPE transaction generally will be used to provide additional capital for the operating company to deploy following the consummation of the business combination.

The 2023 SPAC market has slowed significantly, following a strong 2021 market consisting of 613 SPAC IPOs that closed, which raised an aggregate of over $163 billion. In 2022, there were 86 SPAC IPOs closed, which raised an aggregate of $13 billion. In 2023, as of May 31, 2023, there were 15 SPAC IPOs closed, which raised an aggregate of $2 billion. There are also 46 SPAC IPOs pending, which are expected to raise an aggregate of $5 billion. See (Nasdaq Monthly Monitor, accessed on May 31, 2023). As the SPAC market has cooled, PIPE transactions, a financing tool used to facilitate de-SPAC transactions, have also encountered difficulties. A changing landscape for SPACs calls for an extra measure of flexibility and a willingness to consider alternatives in connection with structuring the accompanying SPAC PIPE transaction.

For more information on SPACs and PIPE transactions, see Special Purpose Acquisition Companies and PIPE Transactions.

  1. Set Out Roles and Responsibilities in the Engagement Letter. The SPAC will often seek to engage one or more of the same investment banks that assisted the SPAC with its IPO as the placement agents for a PIPE transaction. Generally, due to the need to wall cross investors and maintain the confidentiality of the process and for efficiency purposes, it will be preferable to have a lead placement agent who will take charge on form documents. Notwithstanding the prior relationships with the SPAC, the bank selected as lead placement agent should follow its normal practice for a private placement engagement and enter into its customary form of PIPE engagement letter with the SPAC (the acquiring company in the business combination), subject to addressing some special issues applicable to SPACs.

    The letter documents the fees and expenses to be paid by the SPAC in connection with the PIPE transaction. Given that there may be various investment banks advising the SPAC on capital markets advisory matters or on M&A introductions, and these banks may have certain fee arrangements in place, it will be important to address any other existing arrangements. If the engagement is not on an exclusive basis, the letter should acknowledge the inclusion and role of the other engaged agent(s) in the PIPE transaction and specifically allocate compensation between the agents to avoid any unintended overlap or dispute. Engagement letters with multiple placement agents often limit compensation to a percentage of the proceeds received from investors that were actually introduced to the SPAC by the particular agent. The private company target may also have banking relationships and may also have pre-existing commitments to include an adviser in the PIPE process. Usually, the PIPE placement agent will want to consider a fee tail. The fee tail should be addressed in the engagement letter as well. There may also be a right of first refusal or a right of first offer included in the letter relating to future offerings undertaken by the combined company.

    Generally, a PIPE engagement letter would include certain representations and warranties from the issuer relating to the accuracy of the diligence and other materials provided by the issuer to the placement agent. It may make sense to ensure that the private company target be included in such representations since the PIPE placement agent will rely on the diligence materials furnished by the private company target as well as the investor presentation, term sheet, or other materials prepared by the private company target to solicit potential PIPE purchasers.

    Most form engagement letters will include a broad securities indemnification provision wherein the issuer indemnifies the placement agent and certain related parties in connection with losses arising in connection with the transaction. A SPAC will be limited in its ability to provide meaningful indemnification provisions given that the SPAC's proceeds from its IPO will have been deposited into the trust account, and the trust account cannot be accessed other than for limited purposes. Again, this may be another reason for joining the private company target as a signatory to the engagement letter. Alternatively, include the SPAC sponsor as a signatory to stand behind the indemnity and also for purposes of broader fee tail coverage.

    As a result of SEC proposed rules (discussed below), counsel for the placement agent should expand the indemnity provision to cover any untrue statement or alleged untrue statement of material fact contained in any proxy statement and/or registration statement on Form S-4 filed in connection with the business combination. Further, the SPAC and the target company might be required to deliver customary comfort letters, legal opinions and "negative assurance" letters to the SPAC IPO underwriter in connection with the deSPAC transaction. The SPAC might also be requested to provide an officers' certificate, delivered as of the closing of the business combination, signed by its Chief Executive Officer and/or the principal financial or accounting officer, to the effect that the signers have carefully examined the registration statement, each preliminary prospectus, the prospectus and any amendments, as well as each electronic road show used in connection with the offering of the Securities, and the information contained therein is true and accurate as of the date of the business combination closing. The certificate should also cover any projections contained in the registration statement: certifying that those projections were determined in good faith and on a reasonable basis and reflect the current estimates of the consolidated financial position of the Company as of the date of such certificate. For a related template, see Officer's Certificate (PIPE Offering)

  2. Consider Timing of Announcement. Ideally, the public announcement of the execution of the initial business combination agreement will be timed to coincide with the public announcement of the PIPE transaction. In order to facilitate a combined public announcement, definitive commitments for the PIPE transaction must have been received concurrent with the execution of the business combination agreement. The commitment from the PIPE investors would be irrevocable but conditioned on the consummation of the business combination by a specified date (preferably at least six months following the initial announcement of the business combination). The PIPE investor would bear the pricing risk between signing of the subscription agreement and closing. Any shareholder approval requirement that is triggered by applicable stock exchange rules due to the size of the PIPE transaction may be addressed by adding a proposal to the proxy statement prepared to seek approval of the business combination from the SPAC's shareholders.

    Alternatively, the parties may instead publicly announce the execution of the business combination agreement in advance of obtaining the PIPE financing commitment. In this case, the PIPE market process would commence at a time when all the details relating to the business combination are already public. In either event, the PIPE transaction may be structured to have proceeds delivered shortly after execution of the securities purchase agreement into an escrow account with the release subject to consummation of the business combination or paid following receipt of shareholder approval of the business combination (and PIPE offering if applicable) and concurrent with the closing of the business combination.

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Originally published by Practical Guidance

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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