Special purpose acquisition company
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Special Purpose Acquisition Companies
(SPACs) are investment vehicles that allow public investors to invest in areas sought by private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of an initial public offering (IPO).
Contents
Characteristics
SPACs are usually sold in $6 units which consist of one common share and two warrants to purchase shares at a future date. They are also sold in $8 units which consist of one common share and one warrant (finance). SPACs trade as units and/or as separate common shares and warrants. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. The SPAC must sign a letter of intent for a merger or an acquisition within 18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 18 months, the SPAC can close the transaction within 24 months. In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s assets at the time of acquisition and a majority of shareholders voting must approve this combination with no more than 20% of the sharholders voting against the acquisition and requesting their money back. When a deal is proposed, a shareholder can stay with the transaction by voting for it or elect to sell their shares in the SPAC if against it. (This is significantly different from the blind pool - blank check companies of the 80’s, which were a form of limited partnership that doesn't specify what investment opportunities the company plans to pursue.)
The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually locked up for 2-3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to approximately 2.0% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation. In many cases, management agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found.
SPACs have existed in the health care, logistics, media, retail and telecommunications industries for a couple of decades, but more recently, they have sprung up in the public sector, mainly looking to make deals in homeland security and government contracting markets.
SPACs and Reverse Mergers
A SPAC is similar to a reverse merger. However, unlike reverse mergers, SPACs come with built-in investor teams and an experienced management team. They are also set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies in reverse mergers.SPACs typically raise more money than reverse mergers at the time of their IPO. The average SPAC raises about $75 million through its IPO compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs also raise money faster than private equity funds. The liquidity of SPACs also attracts more investors as they are offered in the open market.
Hedge funds and investment banks are very interested in SPACs because the risk factors seem to be lower than standard reverse mergers. SPACs allow the targeted company’s management to continue running the business, where they will sit on the board of directors. After a transaction, the company retains the target name and may register trade on the NASDAQ.
Regulation
The Securities and Exchange Commission (SEC) is currently investigating SPACs to determine whether they require special regulations to ensure that these vehicles are not abused like blind pool trusts and blank-check corporations have been over the years. Many believe that SPACs do have corporate governance mechanisms in place to protect shareholders.Advantages
SPACs are more transparent than private equity as they are regulated by certain SEC rules, including filing their financial statements. Since SPACs are publicly traded, they provide liquidity to an investor (i.e. investment comes in the form of common shares and warrants which can be traded). The unique benefits are the special rights of shareholders to vote in approval or rejection of the deal and the ability for investors to regain most of their funds if the SPAC was unsuccessful. In addition, it is an opportunity for individuals not qualified to buy into hedge or private-equity funds to participate in the takeovers of private operating companies that those funds typically do. Additionally, the SPAC vehicle for the target company is the opportunity to effect a reverse merger that yields more capital.Disadvantages
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks include:- limited liquidity of their securities
- loss of 0-15% of their investments if no M&A deals are made
- lack of investment diversification
- lack of management’s time devoted to SPACs due to involvement in other ventures
Potential Opportunities
SPACs are forming in many different industries and are also being used for companies that wish to go public but otherwise cannot. They are also used in areas where financing is scarce. Some SPACs go public with a target industry in mind while others do not have preset criteria. With SPACs, investors are betting on management’s ability to succeed. SPACs compete directly with the private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these three groups could result in a bid for the best company and possibly increase valuations.SPAC Players
- :1. CRT Capital Group LLC
- :2. Early Bird Capital
- :3. Ferris, Baker Watts
- :4. Maxim Group, LLC
- :5. Morgan Joseph
- :6. Wedbush Morgan Securities Inc
- :7. Broadband Capital Management
- :8. HCFP/Brenner Securities LLC
- :9. I-Bankers Securities Incorporated
- :10. Landenburg Thalmann
- :11. Roth Capital Partners
- :12. Kashner Davidson Securities Corporation
- :13. Viewtrade Securities, Inc
- :14. Joseph Gunnar & Co., LLC
- :15. Bathgate Capital Partners, LLC
- :16. Tower Gate Capital
- :17. Rodman Renshaw
- :18. Newbridge Securities Corporation
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