The SPAC - Special Purpose Acquisition Companies

Last Friday (Dec. 11, 2020), I read on Bloomberg that: “ Innoviz Technologies Ltd., an Israeli lidar start-up backed by two of the world’s largest automotive suppliers, is going public in a $1.4 billion reverse merger with Collective Growth Corp.

The SPAC provided $150 million in cash and raised $200 million from investors in the deal that gives the combined company a $1.4 billion equity value. They expect the transaction to close in the first quarter of next year”.

So I thought to myself: “ SPAC? What is that? and what are the advantages of such for an IPO?”

In General, one can look at a SPAC as the reverse of a traditional initial public offering (“IPO”). A SPAC goes public first, usually with a highly regarded executive team able to raise money from large institutional investors with the intent to acquire a private company to put in its shell within about 24 months.

Some can say that: “An IPO is basically a company looking for money, while a SPAC is money looking for a company”.

What is a SPAC

Special Purpose Acquisition Companies (“SPACs”) or some use the term of “blank-check companies” are companies formed to raise capital in an IPO with the purpose of using the proceeds to acquire one or more unspecified businesses or assets to be identified after the IPO.

According to @CNBC : In 2020 there were 194 traditional IPO deals raised $67 billion, the best year since 2014, while SPACs raised just about the same amount: 200 SPACs raised about $64 billion.

• A SPAC will go through the typical IPO process of filing a registration statement with the U.S. Securities and Exchange Commission (“SEC”), clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO.

• Offering expenses, including the up-front portion of the underwriting discount, and a modest amount of working capital will be funded by the entity or management team that forms the SPAC (the “sponsor”). After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the “business combination”). If the SPAC needs additional capital to pursue the business combination or pay its other expenses, the sponsor may loan additional funds to the SPAC.

• In advance of signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (“PIPE”) commitment, to finance a portion of the purchase price for the business combination and thereafter publicly announce both the acquisition agreement and the committed financing.

• Following the announcement of signing, the SPAC will undertake a mandatory shareholder vote or tender offer process, in either case offering the public investors the right to return their public shares to the SPAC in exchange for an amount of cash roughly equal to the IPO price paid. If the business combination is approved by the shareholders (if required) and the financing and other conditions specified in the acquisition agreement are satisfied, the business combination will be consummated (referred to as the “De-SPAC transaction”), and the SPAC and the target business will combine into a publicly traded operating company.

Comparison a SPAC to Operating Company IPO Process

1. Speed to market - as compared to operating company IPOs, SPAC IPOs can be considerably quicker. SPAC financial statements in the IPO registration statement are very short and can be prepared in a matter of weeks (compared to months for an operating business). There are no historical financial results to be disclosed or assets to be described, and business risk factors are minimal.

2. As a result, the SEC comments are usually few and not particularly cumbersome. From the decision to proceed with a SPAC IPO, the entire IPO process can be completed in as little as eight weeks. On the other hand, the De-SPAC transaction involves many of the same requirements as would be applicable to an IPO of the target business, including audited financial statements and other disclosure items which may not otherwise be applicable if the target business were acquired by a public operating company. The over-allotment option in traditional IPOs (commonly referred to as a “green shoe” or just the “shoe”) typically extends for 30 days from pricing, while the option in SPAC IPOs typically extends for 45 days. Both, however, are 15% of the base offering size.

3. SPAC IPOs have an unusual structure for the underwriting discount. In a traditional IPO, the underwriters typically receive a discount of 5%-7% of the gross IPO proceeds, which they withhold from the proceeds that are delivered at closing. In a SPAC IPO, the typical discount structure is for 2% of the gross proceeds to be paid at the closing of the IPO, with another 3.5% deposited into the trust account and payable to the underwriters on closing of the De-SPAC transaction. If no De-SPAC transaction occurs, the deferred 3.5% discount is never paid to the underwriters and is used with the rest of the trust account balance to redeem the public shares.

4. In a traditional IPO, the sponsor and directors and officers sign a lock-up agreement for 180 days from the pricing of the IPO. For a SPAC IPO, the typical lock-up runs until one year from the closing of the De-SPAC transaction, subject to early termination if the common shares trade above a fixed price (usually $12.00 per share) for 20 out of 30 trading days starting 150 days after closing of the De-SPAC transaction.

At last I can say that there are pros and cons for using blank-check companies in lieu of a traditional IPO. The answers vary depending on the company, but timing, market, comparables and quality of investors all can play a role, as well as how easy it can be to understand what a company does.

I recommend you to read the extended full article of: “ Special Purpose Acquisition Companies: An Introduction Posted by Ramey Layne and Brenda Lenahan, Vinson & Elkins LLP” - https://bit.ly/3mg8Isf

Source:

1. Special Purpose Acquisition Companies: An Introduction Posted by Ramey Layne and Brenda Lenahan, Vinson & Elkins LLP - https://bit.ly/3mg8Isf

2. Crunchbase news - SPAC vs Traditional IPO: Investors See Benefits of Blank-check Companies - https://bit.ly/3oJwBKa

3. Bloomberg - Lidar Startup Innoviz to Go Public in $1.4 Billion SPAC Deal - https://bloom.bg/3mg8T6T