SPACs in 2021: Is the craze here to stay?

It’s a newly incorporated company founded by one or more sponsors, with the single objective of making one or more target "acquisitions". The funds are raised through the IPO process and investors will "buy-in" to the track record and experience of its founders/sponsors, often being high profile wealthy entrepreneurs or private equity partners.

The investment strategy for the acquisition published in its listing document would usually be expected to be completed by the founders/ sponsors within approximately 18-24 months (depending on the rules of the exchange), hence these vehicles often being referred to as "cash shells" or "blank cheque vehicles".

Interestingly, whilst the SPAC can acquire assets through a simple purchase of another entity, there have been a variety of corporate techniques used to make these "acquisitions", including takeovers, mergers with a target and retaining rights in the surviving entity, raising additional funding, being "purchased" by a target (with equity in return) or a reverse takeover where a private (non-listed) company is acquired by the SPAC and then merged with it.  As such, they can be seen as a new way of doing an M&A deal and having a suitably wide definition of the permitted "business combinations" for the acquisition provides useful flexibility.

• A simple and straightforward process for listing a SPAC
• Less time and cost when compared to the traditional IPO process with various road shows
• No requirement to appoint a financial adviser, sponsor or a Nomad (an AIM listed SPAC must have a Nomad)
• Low required minimum market capitalisation
• Potentially flexible application of corporate governance codes
• May not need to provide shareholders with pre-emption rights
• May not need shareholder approval for reverse takeovers or acquisitions
• Generally has greater flexibility around share dealings and related party transactions
• Low cost corporate administration to support the incorporated company during the IPO and acquisition process

Speculative investors will undoubtedly have their preferences on the type of exchange used, and this will be a key driver for the founders of the SPAC who may wish to attract certain types of investors. We have also seen geographical factors at play, such as the attraction of the UK markets for Asian investors and high-net worth entrepreneurs. SPACs are also attractive to hedge funds which can view the holding as a cash proxy and provide investors who can only invest in listed securities with exposure to private companies with illiquid securities.

• Incorporation – Incorporation of the company in the jurisdiction of choice and arranging the key corporate requirements including company secretary, registered office, administration, compliance and accounting.
• IPO and holding funds – Compliance with listing requirements, listing application/approval and management of the cash received (which would be typically placed into an interest bearing escrow/treasury/trust account) and cashflow management to deliver returns which can cover working capital expenses incurred between IPO and acquisition.
• Operation and management of the SPAC – Given the nature of these vehicles, the establishment and running costs associated with supporting SPACs should generally be lower than other more active vehicles, such as investment funds. They will however continue to require governance, compliance, accounting and listing rules monitoring support. It is important to ensure you have visibility and transparency on costs as this can be a distinguishing feature when deciding to outsource the corporate administration.
• Acquisition / M&A – Using IPO proceeds, debt and issuance of equity, the acquisition can be achieved in various ways (as outlined above). Co-ordination and project management by an administrator present in the various jurisdictions can help manage associated costs and work to be undertaken for this corporate event. Depending on the exchange, there may be a variety of shareholder approvals, listing compliance approvals and prospectus issues to be considered.
• Liquidation / wind up – Liquidation may occur if the investment strategy is not executed within the required timeframe and monies will need to be returned to the investors.

There are a number of advantages to using an offshore SPAC, most notably:

• Reduced cost compared to other structuring options
• Ecosystem of experienced service providers and advisers
• Flexible yet robust regulatory environment as regards SPACs and capital raising
• Flexible companies laws and adaptable to the rules of most reputable global exchanges
• Established track record of their use for SPACs