I am Spacman !! What`s in a name?
Special Purpose Acquisition Companies (SPACs) took off in 2020 in the US and since then has also gained popularity in other parts of the world and will continue to boom in 2021 and beyond.
What are SPACs?
A SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the specific purpose of acquiring an existing company. SPACs offer an alternative way for experienced management teams and investors to take companies public and this route to market is enjoying something of a renaissance.
Why have SPACs suddenly become popular again?
SPACs have been around since 1993 but due to low regulations attached to the product they were shunned by major stock exchanges and the main investment banks as the risk of abuse was seen to be too high. The U.S. Securities and Exchange Commission (SEC) have made changes which has brought about an increase in the quality and quantity of SPACs. Prior to May 2017 the New York Stock Exchange did not list SPACs, in 2020 SPACs were top in terms of listing volume on that exchange. Before 2015 many gold bracket investment banks had a strict “no SPAC” policy, now virtually all have a dedicated SPACs team. As the popularity of SPACs has grown in the US so too has it in offshore jurisdictions.
How does a SPAC work?
A SPAC has no commercial operations, but exists solely to raise money by listing on a stock exchange, with the hope of finding and buying a profitable and fast-growing company. SPACs are usually headed up by sponsors who have a track record of buying or running companies. An investor is backing the sponsor and management team’s judgement to find a suitable target company to merge with or purchase. The sponsors generally do not take a management fee but rather a percentage interest (usually 20%) therefore their remuneration is aligned with the success of the SPAC.
A SPAC starts with incorporation, a prospectus is drafted and SEC/listing requirements are completed, the sponsors undertake a roadshow to raise funds and the SPAC gets listed on an exchange.
After a SPAC lists, it has a set time period in which to buy a target (usually 18-24 months, although it is often the goal to have the acquisition completed in 12 months). The unique feature that sets SPACs apart from typical investment deals is that the investor has the opportunity to get their money back plus interest if (a) no deal is forthcoming or (b) they are not satisfied with the deal that is announced.
Once funds are received from investors they are held in a third party trust account.
Once a target company is identified and a merger is announced, the SPAC’s public shareholders may vote for or against the transaction and elect to redeem their investment should they wish. If the SPAC requires additional funds to complete a merger, the SPAC may issue debt or issue additional shares.
The SPAC will typically need shareholder approval to complete a merger and will prepare and file a proxy statement . This document will contain various matters seeking shareholder approval, including a description of the proposed merger and governance matters. It will also include a host of financial information of the target company, such as historical financial statements, management’s discussion and analysis and pro forma financial statements showing the effect of the merger. Once shareholders approve the SPAC merger and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity.
What are the advantages of a SPAC?
Time: A SPAC has a shorter route to market. A traditional IPO generally takes 2 – 3 years to finalise. SPACs are listed generally within 2 – 3 months.
Less Red Tape: A traditional IPO requires 2 or 3 years of audited accounts depending on the type of company. As a SPAC has no transactional history due to it being a clean slate company there is nothing to audit.
Liquidity: A traditionally listed IPO must list and wait and hope for money to come in, a SPAC already has its fund raising completed by the time it is due to incur the expense of a merger. The SPAC therefore does not have to worry about liquidity to the same degree as the traditional IPO company.
Valuation: Public companies trade at higher multiples than private companies, so SPACs offer an opportunity for higher valuation.
Returns for Sponsors: Sponsors take on more risk since investors have the right to take their money back after the deal is announced, however the potential for return for sponsors is extremely high, deals often result in over 6x cash on cash returns.
Why incorporate a SPAC in the BVI or Cayman?
It can often make sense for non-US sponsors seeking targets outside of the US to choose an offshore jurisdiction to incorporate their SPAC as this has the advantage of removing any additional US tax, legal or regulatory implications.
The BVI and Cayman are extremely suitable for SPACs as companies in both jurisdictions:
- are capable of being listed on most global exchanges including the NYSE and NASDAQ;
- enjoy tax neutrality, (i.e. companies are not subject to corporate taxation on income, capital gains or share transfers);
- may have unrestricted objects/corporate capacity;
- benefit from mature and well respected legal systems; and
- can have constitutional documents which may be tailored to suit applicable listing rules and sponsor/investor requirements.
Trust Arrangements in BVI and Cayman
Given the SPAC, at the time of its IPO, has no track record or operating history, investors will want to see their funds protected and managed in a responsible fashion. It is therefore prudent that once the IPO has been completed, a large portion of the net proceeds of the listing, are placed into a third party trust account. Both BVI and Cayman offer trust structures that will provide essential investor and asset protection provisions, including restrictions on when the management team can utilize the trust funds for investment purposes, the amount of such funds and for what purposes those funds may be used.
Trust funds will typically only be released by the trustee, acting as custodian, once a target company has been identified and investors have approved such proposed investments, or may redeem their shares if they decline approval in respect of the proposed investment, or if there is a failure to complete a business combination within a permitted investment period.
AMS Financial Group can assist in the corporate and trusts administrative services to establish a SPAC and a trust, for more information please contact firstname.lastname@example.org
AMS Law can assist with drafting and review of SPAC documents under BVI or Cayman law for more information please contact email@example.com