What is a Special Purpose Acquisition Company, "SPAC"?
At the highest level, a Special Purpose Acquisition Company “SPAC” is an Initial public offering “IPO”. Its sole purpose is to raise capital and use the money raised through the IPO to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more private businesses or entities in line with the management teams, known as the sponsors, prospectus that outlines the specific industry they are targeting. Sources: 4
Many fraudulent investment schemes in the 1980s used Blank check companies, the Penny Stock Reform Act of 1990 and SEC Rule 419 regulate them.
David Nussbaum pioneered SPACs in 1993 as a replacement for the blank check company. Creative lawyers came up with ways to comply with the purpose of the new regulations of giving investor protection.
The current environment
SPACs offer companies that want to go public, certain advantages over traditional IPOs. Virtually every SPAC deal involves buying private companies. In practice, this allows private companies to go public rather than participating in the traditional IPO process.
SPACs have become more prevalent in recent years, attracting big-name insurers and investors and bringing in a record number of IPOs in 2019. Sources: 2
Issuance is on the up
By 2020, more than 59 SPACs had been established in the U.S., raising approx: $24 billion according to Thomson Reuters data. Although they are in the headlines, SPACs are rarer in Europe, with the majority of London-listed companies over the past decade having a U.S. focus, often acquiring US-focused companies, and then moving their listings from London to the U.S. Sources: 2, 3
According to the Wall Street Journal, in 2020, 240 SPACs conducted IPOs and raised $80 billion, compared with 59 in 2019. The surge looks set to continue into 2021, with many Venture Capital firms looking to list.
An excellent year for Tech companies going Public
Tech companies raised USD 55 billion in 2020 across 257 listings, with Asia-Pacific seeing a 13% increase year-on-year. What had initially looked like a sluggish 2020 for tech IPOs, it turned into a blockbuster one! High-profile companies such as Airbnb, Palantir and DoorDash went public, and 2021 also saw the biggest ever software IPO with Snowflake.
Investors saw a bumper year of Tech companies going public, the most exciting and best-performing sector. They can now invest in private companies through publicly-traded equity, which has led them to invest in SPACs. The vast majority of investors are long-only funds, alternative investment managers and people who are super excited about technology as a long-term disrupter and want to invest in this next generation of iconic companies.
Some Venture Capital blank check companies
Will SPACs disrupt Venture Capital?
If a SPAC raises its capital through an IPO, it has two years to complete the acquisition, and its sponsor must return the money to investors. If it fails, the SPAC faces a 10% penalty of the funds invested in the IPO and a $1 million fine.
With big Venture capital groups, such as Softbank joining the Blank check company party, (launching a $525 million SPAC to bridge private and public investing strategies by enabling them to partner with a fast-growing, IPO-ready technology company), will inevitably make it harder for sponsors to find target companies, as these blank check companies now have to compete to find the best companies to acquire rather than standing at the altar.
Sponsors are likely to be seen entering the electric vehicle market, renewable energy, energy storage and energy efficiency, just over one-third of blank check companies since 2018 have been climate-related according to Climate Tech along with HeathTech which has proven popular in the past year and has witnessed a wave in the number of companies interested in IPOs with a SPAC listing.
As is evident, with more SPAC listings, the competition for targets will lead to better terms and higher valuations for entrepreneurs; this will have knock-on effects through the entire ecosystem.