If at the beginning of the Covid-19 crisis the world stock markets collapsed and the future looked bleak, pretty quickly the markets started to flourish again and it seems that one buzzword grabbed more and more headlines: SPAC. If between the years 2009-2016 we saw about 10 American SPAC vehicles on average per annum, by 2020 there were above 250 of those, and in the first quarter of 2021 alone, almost 300 SPAC IPO's! So, what does SPAC stand for?
Although the use of this mechanism became extremely trendy in 2020, in fact, SPAC is a long-standing term in the capital markets and is an acronym for Special Purpose Acquisition Company. In practice, this is a "shell corporation", a company that was IPO'ed from the outset without any activity and with the aim of merging with a target company within two years, at the discretion of the management and if such a merger does not take place, the money will be repaid to the investors. This mechanism allows companies to enter from the "back door" to the stock exchange in a relatively quick procedure and it replaces the reverse merger mechanism with a shell company that was popular in the past, and resulted sometimes in a healthy company to merge with a "sick" shell, sometimes finding itself with a Pandora Box it did not intend to open.
But not everything is rosy. SPAC managers have a desire to maintain their reputation and therefore will work hard to find the correct target company and will usually look for such with the highest value (usually, over $ 200 million) that may be purchased at a relatively inexpensive price. However, because a SPAC has an expiration date of two years, its managers may be tempted to make less than ideal transactions as the two-year period draws to a close, in order to avoid repaying funds to investors. These managers have no legal liability to investors for the target's forecasts, unlike the liability imposed on underwriters in a normal underwritten IPS, so if the transaction did not yield the desired results the investors may lose their money. However, creating a too high liability will prevent the taking of risk and prevent good companies from enjoying this efficient tool.
It seems that the US Securities and Exchange Commission is also beginning to take a close look at the issue of SPACs. In a directive issued by the SEC at the end of the first quarter of 2021, which justifies a separate article, the SEC regulated the way in which the rights issued to the SPAC investors should be presented, which in fact, until the merger with the target took place are funds that may be required to be repaid. Beyond the accounting implications, one can learn from the very issuance of the directive that the SEC is closely examining SPACs and the need for supervision thereupon, and it may only be assumed that further guidelines will be issued on the subject.
In practice, for the target company, the SPAC transaction is an M&S transaction (only more complex than a regular M&A transaction and with significant continuing consequences). Thus, the merger with the SPAC will commence with a due diligence review by the SPAC and usually the SPAC will seek to receive an external valuation of the target company. A company considering a merger with a SPAC need prepare in advance. To do this, a company should contract a law firm specializing in M&As that is acquainted with the SPAC field, has done such work before and has the right connections, and can prepare the company in advance, even before the initial contact with the SPAC, as well as one that is able to accompany the company throughout the process. Here too, as always, there is no second chance for first impression.