“Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?”
– Simon Sinek.
In recent years, the emergence of Special Purpose Acquisition Companies (SPACs) in several European jurisdictions’ stock markets has surprised the world. Also commonly known as ‘blank check companies,’ it is usually formed by sponsors or by an established, competent investor who most often serves as the public face or image of the SPAC. A SPAC is a company that is established for a specific reason. It will be listed publicly, like on NASDAQ, for example. SPACs possess no mission statement, no company goals, no intended business operations, or KPIs or targets.
Their sole objective is to obtain the capital that is raised in Initial Public Offerings (IPOs) to purchase other companies. Oftentimes, the IPOs haven’t been identified yet. Subsequent to raising capital through an IPO, the investors will have a restricted timeline (18 to 24 months) to identify a target company and complete the acquisition.
The U.S. law contains a rule stipulating that the assets of a SPAC should be 80% of the target company’s market value. Should the restricted period expire before the acquisition of a company is completed, the SPAC will be dissolved, and the proceeds of the IPO that were held in a trust account will be given back to the investors. After the SPAC sponsors have picked out the target company to acquire, the SPAC needs to gain approval from shareholders to complete the process of acquisition of the company. It will then offer the investors two options which are either to reclaim the common stock in the SPAC for the original purchase price including interest or to sell the stock in the market. Once the target company is acquired, the sponsors will benefit and receive a profit from their stake in the new company, which is usually 20% of the common stock; meanwhile, the investors will receive an equity interest in accordance with their capital contribution.
The route to establishing a traditional IPO is long and complicated compared to setting up a SPAC. With an IPO, taking the company public has specific requirements from the country’s regulated authorities the company is set up. The IPO process is similar to a roadshow; the company is exhibited in front of investors to get them interested, and negotiating with multiple investors who are often institutional investors is complex and uncertain. Uncertainty can affect the IPO process, as what happened in the case of WeWork. The company was expected to raise $4 billion USD with an IPO and faced intense scrutiny of its finance and leadership from the media and investors, causing them to back out, and their IPO was cancelled.
SPACs can provide various benefits over a traditional IPO, and that includes quicker access to the public markets, flexible structures, more attractive funding, etc.
SPACs are usually established for a specific reason, and usually, the investors who purchase the SPACs shares in the IPO possess the money to invest. Should a small company desire growth, the method is an assured way to acquire exposure to well-established investment firms and get multiple funding sources. In contrast to a traditional IPO, there is no time limit to making a deal when using a SPAC. Although most SPACs require two years to make an acquisition, there is however no rush to go public in the market. The SPAC has its own IPO process, which is already funded, and it is where the majority of its capital is generated from. A SPAC will also be able to issue equity or take on debt if need be.
A SPAC will be an easier way to raise capital compared to a small private company. It is a less turbulent way of taking a company public. A SPAC is an easy way for investors to purchase small companies and create one new company that will leverage the assets of the people involved in it. Owners may be compensated with cash or shares, which is an optimal and effective way to monetize a private company. A SPAC also can issue shares to fund a large acquisition or pay off the debts of a target company.
Like any other public company, the goal with SPAC is to bring their assets to the public market, usually resulting in a reverse merger in order to take convert private assets and make them public. There is very little chance for the merger to fail, and the costs are significantly lower than an IPO. There is currently no statute or Law that governs SPACs in the UAE or any other country except Malaysia and South Korea. SPACs are, however, are welcome in the financial market of various countries such as the U.S., UK, Canada, Netherlands, New Zealand, just to name a few, and are listed on the stock exchange of these countries. Malaysia has established a specific regulatory framework dedicated to SPACs by the Security Commission. It states that only a SPAC incorporated under Malaysian Law shall be listed on the stock exchange.
Furthermore, the Toronto Stock Exchange (TSX) has established guidelines for the sole purpose of acquiring a SPAC. The United States regulators are NYSE, formerly known as the American Stock Exchange, NASDAQ, and NYSEMKT. The Korean Exchange (KRX) has provided a definition that is under Section 6 (4) (14) of the Financial Investment Service and Capital Market Act and is listed as public companies under the KOSDAQ and KOSPI market in South Korea.