Crocker Coulson examines explosive rise and uncertain outlook for PSPCs

After more than two decades of being the “red-haired son-in-law” of the IPO market, PSPCs became an overnight sensation in 2020 and the first quarter of 2021. Investors were making a big splash. Wall Street companies are riding money on PSPC IPOs. The Reddit brothers of wallstreetbets them “went up to the moon”.

In 2020, 248 SAVS raised $ 83 billion in initial public offering (IPO), against a total of only $ 3.5 billion in 2016. The momentum continued in 2021, while 378 SAVS raised an additional 115 billion dollars, far exceeding the $ 85 billion raised by 236 companies with actual operations so far this year. How is it that PSPCs, which are essentially empty shells laden with cash in search of a promising company, have become the darlings of Wall Street? And is PSPC’s dominance a lasting trend or a fleeting feat of financial engineering?

SPAC - ad hoc acquisition company
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Crocker Coulson, a capital markets expert from Brooklyn, New York, explains how SPAC works, identifies some recent trends in the industry and how SPAC regulation may influence its future.

What is a SPAC?

SPAC stands for Special Purpose Acquisition Company. A SPAC is a “blank check” entity that exists only to buy private companies seeking to raise growth funds and achieve public status. PSPCs are organized by “sponsors” who must provide funds to cover the costs of the IPO and, in return, receive shares equivalent to 20% of the capital raised. However, these “promotional actions” have no value unless the SAVS performs a merger – otherwise, they expire without value.

SPACs often identify an industry or geographic region where they seek merger targets but are not forced to exit from those areas. And SPACs cannot engage in merger discussions or choose their merger partner before the IPO. Hence the term “blank check” offer. Investors literally give sponsors a bank account to look for the best deal. The only catch is, if PSPC investors don’t like the deal presented to them, they can request that all of their money, which is held in trust, be returned with interest.

Benefits of PSPC mergers

For a private company, the advantage of merging with an SPAC is that a high growth company can often access more capital through the public market, especially if it has already completed several rounds of venture financing. Existing shareholders can also put pressure on management to offer them an exit, especially if their venture capital fund comes to the end of its life. Management can also retain more control over its operations through a public listing instead of private equity transactions that may come with board representation requirements and onerous terms.

Compared to a traditional initial public offering (IPO), SPAC mergers have the advantages of speed and security of execution. A PSPC merger can be completed in four months versus nine months to one year for an IPO if a company is well prepared with audited financial statements and solid forecasts. Targeted companies negotiate their valuation and minimum cash requirements directly with the sponsor PSPC, rather than relying on the vagaries of the market.

In almost all cases, PSPCs will also seek to raise additional funds through a PIPE, or private investment in public equities, in which large institutional funds or strategic investors commit to invest. additional funds in the transaction. This helps increase the income of cash-hungry businesses and provides a minimum amount of committed capital at the close of the merger. PSPCs have proven particularly appealing to companies in pioneering industries like electric vehicles, space travel and artificial intelligence, which need to make significant investments to realize their vision of transforming industries.

Once the PIPE investors have been secured, PIPE will make a public announcement presenting the new price to the public markets for inspection. If investors like the outlook for the company and think it is reasonably priced, the share price can skyrocket, a clear sign that all of the PSPC money will stay in the deal and the company will reap the entire product. If the stock trades after the transaction is announced and falls below the $ 10 trust money threshold, this suggests that PSPC could experience large redemptions and the stock price could drop. ‘collapse after the merger closes.

Successful SPACs need to present a very compelling investment story when they first announce the deal and then create a rich and continuous communication flows with investors until the day of the shareholders’ vote to maintain interest in history.

Increased regulation of the PSPC market

One of the main forces in the boom in the SPAC business is that investment banks like Goldman Sachs, Citigroup and Credit Suisse have all become significant players in the underwriting of SPAC IPOs. In addition, many large private equity firms and leading venture capitalists have launched their PSPCs, confirming that the product has become mainstream.

However, with the potential to make tens of millions of dollars from a single transaction, SPACs have also attracted their fair share of snake oil vendors and unscrupulous operators. High-profile PSPC mergers including electric vehicle companies Nicolas and Lordstown Engines, Shamath Palihapitiya’s Clover Health, and healthcare company MultiPlan have been accused of omitting essential information or even engaging in outright fabrication in their investor disclosures.

The SEC has become increasingly concerned about the sheer volume of PSPC transactions and the potential for retail investors to lose money in transactions that can lead to conflicts of interest. Commission issued investor alert urging shareholders do not rely on the involvement of famous SPAC sponsors – like Serena Williams, Jay-Z, Shaquille O’Neal, Alex Rodriguez and Colin Kaepernick – when considering the relevance of buying stocks.

More recently, the SEC Acting Director of Corporate Finance sounded the alarm on the financial projections that some developing-phase PSPC agreements use to forecast massive revenue and profit growth in the years to come. PSPC mergers should not be assumed to be immune from legal liability if those forecasts turn out to be overly optimistic, he said, contradicting the assumption that such statements were protected by the ” safe harbor ”which allows operating public companies to present the economic assumptions used. when they make an acquisition. As if to drive the point home, a few weeks later, the SEC engaged in a enforcement action against a PSPC called Stable Road Acquisition Company who offered to merge with a space transportation company Momentus, but failed to disclose that its recent rocket launch was a failure and that its CEO had a track record that would bar the company from winning government contracts.

SEC Commissioner Gary Gensler explained that PSPC should be held accountable for breaches of disclosure: “This case illustrates the risks inherent in PSPC transactions, as those who could derive significant benefits from a PSPC merger can do so. evidence of inadequate due diligence and misleading investors.

The future of PSPC

While PSPC’s IPOs are unlikely to keep up with the rapid pace of the first quarter of 2021, the structure of the transaction is very well suited to companies with specific characteristics. It offers rich rewards to negotiators who can research and structure a winning business combination.

While regulators are rightly concerned about the potential for abuse of SPAC by bad actors, the market appears to be sorting out the substance from the hype. Decisive enforcement action when PSPC sponsors publish fraudulent information, or fail essential due diligence, is more effective in reforming the market than new regulations.

On the positive side of the ledger, SPACs democratized the investment market in several important ways:

  • SPACs offer individuals and small investors the opportunity to invest in early stage companies that were previously the exclusive preserve of the largest venture capital funds and cross funds.
  • SPACs have encouraged companies to publicly share their long-term business strategy and financial models in a way that is only accessible to preferred institutional clients under a traditional IPO.
  • SPACs alone have reversed the long-term decline in the number of public companies due to industry consolidation and the loss of mid-size underwriters in the IPO market.
  • SPACs inject large amounts of fresh capital into industrial sectors that may be at the center of our economy’s next evolution, with innovative products and business models that might otherwise lack funding.

With all of these positives comes a crucial caveat. Early stage companies, even the larger ones that make up many large PSPC mergers, have the potential for both home runs and catastrophic failure. Venture capital funds recognize that most transactions they invest in won’t work, but they rely on 20% of their positions to produce 90% of their returns. Although SPACs can make an attractive investment enhancement, they are not suitable for the basic retirement nest egg.

Crocker Coulson believes that after-sales service will be an integral part of the investment landscape. This uniquely flexible vehicle will continue to evolve in response to the financing needs of companies and the attractiveness of investors for their unique combination of pre-merger security of capital with the opportunity to participate in the next enticing transaction.

Interesting related article: “What does M&A mean?” “