/cloudfront-us-east-2.images.arcpublishing.com/reuters/JEUL2B5V7BJCFMRTKGOS3ZSN4Y.jpg "Hungary’s anti-LGBTQ law breaches international rights standards – European rights body")
/cloudfront-us-east-2.images.arcpublishing.com/reuters/DYF5BFEE4JNPJLNCVUO65UKU6U.jpg "The curious case of a map and a disappearing Taiwan minister at U.S. democracy summit")
/cloudfront-us-east-2.images.arcpublishing.com/reuters/UF7R3GWJGNMQBMFSDN7PJNRJ5Y.jpg "Blinken touts deeper U.S. engagement amid concern over ‘aggressive’ China")
United States:
To SPAC or IPO
July 30, 2021
Masuda, Funai, Eifert & Mitchell, Ltd.
To print this article, all you need to do is register or log in to Mondaq.com.
Much has been said about Special Purpose Acquisition Companies (“SPAC”) and their revitalized use to raise funds through an initial public offering (“IPO”). In 2020, 248 SPACs were formed, raising approximately $ 83 billion. In early June 2021, around 430 additional SPACs began raising over $ 100 billion. The use of SPACs does not seem to be slowing down.
Some companies are considering either going public through an IPO or being acquired through a SPAC. Each option has advantages and disadvantages that should be considered.
As a backdrop, a SPAC is a shell company that has nothing to do but find a target to acquire and merge to bring the target to the public. Investors in a SPAC do not know which business they will ultimately invest in.
Sponsors creating the SPAC usually make a nominal investment (usually a combination of stocks and warrants) but own about 20% of the SPAC. The sponsors’ money will be used to finance the IPO and for working capital purposes. Sponsors can be private equity or a group of experienced executives.
Investors’ investment in the SPAC IPO is typically held in trust until the target is identified and the merger is approved by shareholders or if a liquidation occurs because a merger with a target has not completed in the required timeframe.
Typical SPACs have 18 to 24 months to locate a target and complete the transaction (with the aim of merging) and bring the target to the public (“DeSPAC”).
What makes SPACs attractive is that they provide a way to get the target company public in less time without some of the price volatility that occurs with traditional IPOs. The value of the target is agreed between the SPAC and the target. Investors in the SPAC who do not agree to the proposed merger can get their investment back. Investors also have the right to approve or reject the merger with the aim of doing so.
Below is a simple rundown of some of the differences between a SPAC and a traditional IPO.
|
SPAC |
Traditional IPO |
|
|
Schedule until the IPO |
3 to 6 months – the review process will be postponed to De-SPAC |
12 to 18 months – full SEC review process |
|
price |
More price security and limited market fluctuations |
Full risk, including market fluctuations, as the price is set when the company goes public |
|
dilution |
SPAC sponsors typically own 20% of the shares, warrants and earnouts |
default |
|
Redemptions |
Shareholders can redeem their Shares at any time, and if too many redemptions are made, the SPAC may not have the funds required for De-SPAC |
N / A |
|
Insurance |
2% fee at the beginning and 3.5% upon completion |
6% to 7% subscription fee |
|
Others |
The target company usually bears the brunt of SEC-required regulatory filings in a shorter timeframe, which can lead to errors and litigation |
If you are a private company considering an IPO, either a SPAC or a traditional IPO may be an option for you.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
POPULAR ARTICLES ON: United States Corporate / Commercial Law
ESG disclosures for financial institutions
Arnold & Porter
In recent years, the market has seen an increase in environmental, social and governance (ESG) disclosure by publicly traded companies in response to pressure from a variety of beginnings
New challenge submitted for California Board of Directors quota laws
Allen Matkins Leak Gamble Mallory & Natsis LLP
Earlier this month, a Texas non-profit association filed a lawsuit in the United States District Court for the Central District (Western Division) of California, seeking Alliance For Fair Board Recruitment v. Weber ..
Fiduciary duties in M&A transactions in family businesses
Davis Wright Tremaine
A company’s board of directors is required by law to act in the best interests of its shareholders. These duties (commonly referred to as “fiduciary duties”) apply to family business directors as they do to any other director.
