FÉLIX GLORIEUX
KHALIL ABBOUD
SPAC, an innovative way to go public
The choice to go public is a very important decision for a company. It is the end of one stage in the company’s lifecycle and the start of another. Being listed on the stock market brings a number of benefits to the company, whether for financial reasons or increased visibility. Effectively, this is a process that, not only allows early investors to cash out their investments, but also helps raise capital by making a company’s shares available to the general public.
Traditionally, a company goes public through an initial public offering (IPO) or direct public offering (DPO). The major difference between these two types of offering is that one sells existing shares whereas the other issues new ones. Thus, during a DPO, employees and/or investors sell their existing shares to the general public while during an IPO, the company goes public by issuing new shares. The choice of type is based on the company’s purpose behind the idea of going public. Thus, if the company does not have the will to raise funds, it will use the route of a direct public offering, which is the reason for not issuing new shares.
Recently, a new method, an increasingly popular trend in the financial world, is being used by companies to go public: by going through a Special Purpose Acquisition Companies or SPAC, also known as Blank Checks Companies.
SPACs are “shell companies” whose objective is to raise capital through an initial public offering – IPO – to acquire a private company. A SPAC does not make any product or sales. The only asset of a SPAC is its market funds, typically worth between $ 300M and a few billions. These funds come from an IPO where the common share price is generally as low as 10$. Two scenarios can take place: the SPAC can either accomplish its mission and acquire a company and make it public, or it can be liquidated, and its investors get reimbursed, if ever it has not merged or acquired a private company within the time limit, usually between 18 and 24 months. It is important to note that the fair market value of the target company must be at least 80% of the assets of the SPAC.
An interesting comparison can be made between a SPAC and an arcade claw machine: it is possible that the company obtained turns out great, as it is also possible that it ends up mediocre or even that the investors do not get any company at all despite his investment.
Since SPAC companies are “shell companies”, the reputation of the management team is an important success factor. Once the company acquisition is complete (with SPAC shareholders having voted to approve the transaction), SPAC investors can either exchange their shares for shares of the merged company, or they can buy back their SPAC shares to recover their initial investment in addition to accrued interest.
Benefits of going through a SPAC to become public
Lately, many companies are taking the path that includes using a SPAC company to go public for several reasons.
First and foremost, the process is much faster if the company goes public through a SPAC. Indeed, it can take up to 8 months for a company to go public via an initial public offering (IPO) or via a direct public offering (DPO), if the offering is coordinated and managed correctly. On the other hand, going public through a SPAC can take up to four months.
Also, to be listed on the stock exchange (IPO), the company must meet several qualifications. For example, NASDAQ requires its societies to have a market value of at least $ 1M. It also needs to have assets of at least $ 4M, a minimum of 300 shareholders, and much more. Companies that fail to meet at least one of these requirements cannot be listed on the stock exchange through traditional channels, even if they have great prospects for potential growth. These firsts can, on the other hand, be registered by going through a SPAC, a method that has no threshold for an introduction in the stock exchange
Fear of investing in a SPAC
Apart from the fact that an investor investing in a SPAC makes a blind investment since he has no knowledge of how its capital will be used, there are several risks or fears that are associated with this type of societies.
For starters, with the wait to release a SPAC being much lower than that of a traditional IPO, some people would be wary of a lack of in-depth reviews on the company.
Then, as a rule, the sponsors – the management team of a SPAC – get about 20% of the founder’s shares at a reduced price, which dilutes the ownership of the public shareholder.
In addition, there are now hundreds of SPACs looking for companies to merge with. This explosion in SPACs’ supply means businesses can shop around and ask for better terms, which can reduce the upside potential for an investor when a merger is announced.
A study of 56 SPACs that completed acquisitions in 2018 showed that they tend to perform below the S&P 500 over a period of 3, 6 and 12 months. A second study has shown that most SPACs having completed acquisitions between 2015 and 2019 are trading on the stock exchange below the standard price of $ 10. Finally, between 2017 and 2019, there were 108 SPACs in the United States and their average return over that period was barely 2%.
How to invest in a SPAC
The general public can, in fact, invest in a SPAC. Just like any publicly traded stock, it is very easy for anyone to invest in a SPAC through an online brokerage account. Another approach would be to invest in a group of SPAC through an ETF (exchange-traded fund) type fund.
In the table below taken from Forbes Advisor, it is possible to see the 10 most popular SPACs, their market capitalization as well as their target acquisition (for some SPAC, the target acquisition is not yet announced).
|
SPAC name |
Symbol |
Market capitalisation (25 February 2021) |
Target acquisition |
|
Churchill Capital Corp IV |
CCIV |
$ 7.2 B $ |
Lucid Motors |
|
Pershing Square Tontine Holdings |
PSTH |
$ 5.8 B $ |
– |
|
Foley Trasimene Acquisition Corp II |
BFT |
$ 2.8 B $ |
Paysafe |
|
Social Capital Hedosophia Holdings V |
IPOE |
$ 1.9 B $ |
SoFi |
|
Star Peak Energy Transition Corp |
STPK |
$ 1.5 B $ |
Stem |
|
CC Neurberger Principal Holdings II |
PRPB |
$ 1.2 B $ |
– |
|
GS Acquisition Holdings Corp II |
GSAH |
$ 1.1 B $ |
– |
|
AJAX I |
AJAX |
$ 1.1 B $ |
– |
|
Social Capital Hedosophia Holdings IV |
IPOD |
$ 814 M $ |
– |
|
VG Acquisition Corp |
VGAC |
$ 709 M $ |
23andme |
Kensington Capital Acquisition Corp, best Performing SPAC of 2020
SPACs are obviously a relatively risky investment, however there are several examples of companies having successfully made this transition.
A concrete example of a successful special purpose acquisition company is Kensingtion Capital Acquisition Corporation which merged with QuantumScape Corporation last fall. Kensingtion Capital Acquisition Corp is a SPAC funded by Kensington Capital Partners LLC which acquired, in late November 2020, a leading developer of next generation batteries for use in eclectic cars, an increasingly popular product. The shares, following the merger of the two companies can be bought under the symbol $ GS on the NYSE, have seen a boom of more than 60% in just a few hours; they went from 23.50 USD on November 27, 2020 at 10:30 am to 37.60 USD, three and a half hours later. Today, the share price has stabilized around $ 55 after peaking at around $ 115.
References
Ashford, K. (2021, February 19). Initial public offering: What is an ipo? Retrieved March 17, 2021, from https://www.forbes.com/advisor/investing/initial-public-offering-what-is-an-ipo/
Benzinga, S. (2021, February 22). Spacs vs. traditional ipos. Retrieved March 17, 2021, from https://www.cfo.com/capital-markets/2021/02/spacs-vs-traditional-ipos/
CFI. (2020, June 30). Special purpose acquisition Company (SPAC) – OVERVIEW, how it works. Retrieved March 01, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/strategy/special-purpose-acquisition-company-spac/
Daks, M. (2020, October 19). A SPAC is a high-risk but potentially profitable way to get in on the ground floor of a new stock – here’s everything investors need to know. Retrieved March 01, 2021, from https://www.businessinsider.com/what-is-a-spac
Direct listing – overview, pros & cons, and difference from ipos. (2020, February 18). Retrieved March 17, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/finance/direct-listing/
Going public: How long does it take? (n.d.). Retrieved March 17, 2021, from https://www.streetdirectory.com/travel_guide/18694/corporate_matters/going_public_how_long_does_it_take.html
Jackson, A. (2021, March 09). Special purpose acquisition company: What is a spac? Retrieved March 17, 2021, from https://www.forbes.com/advisor/investing/spac-special-purpose-aquisition-company/
Jr., T. (2021, February 24). What is a spac? Explaining one of Wall Street’s hottest trends. Retrieved March 01, 2021, from https://www.cnbc.com/2021/01/30/what-is-a-spac.html
Moore, S. (2020, October 19). The risk and returns for the increasingly popular spac trade. Retrieved March 01, 2021, from https://www.forbes.com/sites/simonmoore/2020/10/19/the-risk-and-returns-for-the-increasingly-popular-spac-trade/?sh=3254dd03297f
Nate NeadNate Nead is a licensed investment banker and Principal at Deal Capital Partners. (2014, October 17). Nasdaq listing requirements. Retrieved March 17, 2021, from https://investmentbank.com/nasdaq-listing-requirements/