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A Rebirth of Initial Public Offerings by Special Purpose Acquisition Corporations (SPAC)?

spacauctionHedge funds and investment banks are very interested in Special Purpose Acquistion Corporations (SPAC)s because the risk factors seem to be lower than standard reverse mergers. Why?

  • SPACs allow the targeted company’s management to continue running the business, sit on the board of directors and benefit from future growth or upside as the business continues to expand and grow with the public company structure and access to expansion capital.
  • The management team members of the SPAC will typically take seats on the board of directors and continue to add value to the firm as advisors or liaisons to the company’s investors.
  • After the completion of a transaction, the company usually retains the target name and registers to trade on the NASDAQ or the New York Stock Exchange. SPACs listed on the American Stock Exchange are required to be Sarbanes-Oxley compliant at the time of the offering including such mandatory requirements as a majority of the board of directors being independent and audit and compensation committees.

Since the late summer of 2010, the SPAC vehicle has reemerged with new features, including smaller sponsor promotes (reduced from 20-25% to 10-15%), much lower maximum redemption thresholds (reduced from 70-80% to 12% or less), and longer windows to get a deal done (extended from 18 to 36 months). While hedge funds will still be attracted to SPACs for the ability to sell the warrant and lock-in gains, the most difficult obstacles to executing a business combination have been removed, which should make it a more palatable vehicle for potential sponsors and management teams.

Many had written off the SPAC vehicle due to the large number of liquidations witnessed in 2008, 2009 and 2010 as SPACs that had succeeded in raising money before the market shut down could not succeed in consummating a business combination. But with the new NYSE Amex and NASDAQ rules no longer requiring the super-majority vote and new features that remove the hurdles to completing a business combination, the SPAC is proving to be a more attractive vehicle for promoters to raise money in the public markets.

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