The SPAC is Back?

Just what is a SPAC? A SPAC is a blank-check company that raises capital in an initial public offering to use for a future undetermined acquisition of one or more operating businesses or assets. A typical SPAC offering consists of a unit composed of shares of common stock as well as discounted warrants that can be sold shortly after the IPO, providing an opportunity for immediate return. For the protection of investors, SPACs are structured so that the proceeds of the IPO are held in trust until the SPAC uses the funds to consummate an acquisition.  If a qualified acquisition is not completed within a specified period of time following the IPO (typically 18-24 months), the SPAC liquidates and distributes the funds held in the trust account to its common stockholders.

SPACs proved to be attractive to investors, particularly hedge fund managers, for a number of reasons, most notably the opportunity for a locked-in rate of return achievable on a sale of the warrants and additional arbitrage opportunities for any warrants retained, low volatility of a mostly-cash balance sheet, minimal downside risk given the cash is held in trust and the potential large upside in the context of an acquisition.

However, SPACs fell out of favor for, while these vehicles were successful in raising money, many were unable to consummate acquisitions.  SPACS may once become interesting to investors given a number of recent regulatory changes.  For instance, the new NYSE Amex and NASDAQ rules no longer require a super-majority vote on a potential acquisition while other new features remove some of the hurdles to completing a business combination.

In earlier years, SPACs typically did not qualify for listing on any US exchange and, for the most part, were traded on the OTC Bulletin Board and faced many restrictive SEC regulations.  In 2005, the American Stock Exchange, now the NYSE Amex, began allowing SPACs to list under generic listing standards that did not require companies to have operating histories, and most subsequent SPAC offerings listed on that exchange.  A few years later, the Big Board (NYSE) and NASDAQ proposed rule changes to allow SPACs on those exchanges.

Late last year, the NYSE Amex adopted SPAC-specific listing standards that require:

  • at least 90% of the gross IPO and other investment proceeds to be held in trust
  • the SPAC to complete one or more business combinations within three years following the IPO with an aggregate value of at least 80% of the net value of the funds held in trust
  • the initial business combinations that satisfy the requirement above must be approved by a majority of the votes cast by public stockholders (subject to exclusions under NYSE rules for officers, directors and 10% stockholders)
  • public stockholders voting against the proposed business combination to have the right to redeem their stock for a pro rata share of the trust funds if the deal closes, subject to a stated limit of the maximum number of shares that can exercise such redemption rights (which limit cannot be less than 10% of the shares sold in the IPO)

These NYSE Amex listing requirements were similar to NYSE and NASDAQ SPAC listing requirements. The NYSE imposed additional conditions, including that SPAC founders be required to waive their rights to liquidation proceeds for all securities issued to founders prior to the IPO or purchased in private placements in conjunction with the IPO and that SPAC underwriters must waive deferred underwriting discount in the event of a liquidation. NASDAQ added a requirement for business combinations to be approved by a majority of the independent directors as well as stockholders.

There are additional changes which may spur a renewed interest in SPACs.  These include smaller sponsor promotes (reduced from 20-25% to 10-15%), much lower maximum redemption thresholds (reduced from 70-80% to 12% or less), and extended periods for which to consummate a transaction.  While investors will still be attracted to SPACs for the ability to sell the warrant and lock-in gains, the most difficult obstacles to executing a business combination have been removed, which should make it a more palatable vehicle for potential sponsors and management teams.