What are Special Purpose Acquisition Companies?

By Thapelo Moribame

Head of Market Development, BSE

1. What is a Special Purpose Acquisition Company (SPAC)?

• SPAC trends globally
• The financial community has embraced SPACs as an alternative source of capital.
• SPAC capital for mergers and acquisition activity is now regarded as a legitimate way to go public, given SPAC activities in recent years and the amount of money sitting in SPAC trust accounts.
• Private equity firms are not the only ones taking advantage of the SPAC model, family wealth offices, foreign private equity firms, and high-profile investors are launching SPACs on stock exchanges especially in the US. Some of these groups team up with underwriting firms and private equity firms to co-sponsor a SPAC launch.
• There are no prohibitions both regulatory and legal on sponsors launching their own domestic SPACs for local and foreign deals.
• For example, in the US, foreign companies are listing SPACs on US exchanges to go public in the U.S or merge with businesses based across the world.

THE ROLE OF SPONSORS – A SPAC is formed by experienced business executives who are confident that their skills and experience will enable them to identify profitable companies to acquire.  Since a SPAC is a shell company with no commercial operations, the founders’ vision and reputation is a selling point when engaging prospective investors.  The founders will hold shares in the shell company since they provide the starting capital and the vision for the company. The proceeds of the investment are used to cover underwriting fees and expenses that the SPAC incurs during its search for a target and, in some SPACs, to augment the return to redeeming shareholders. Additional investment by the sponsor, can actually worsen the misalignment of a sponsor’s incentive because the investment will be lost if the SPAC does not merge or acquire assets.

THE IPO – For the IPO process, the SPAC has to simply comply with the listing rules of that particular exchange when issuing. The SPAC will then be required to engage the required team of advisors to handle the IPO at the agreed fees just like any other equity listings. Since this is a shell company with no operations, the prospectus mainly focuses mainly on the sponsors and less on the history of the company. Proceeds from the IPO are then held in a trust account until an acquisition target is identified.

ACQUIRING A TARGET COMPANY – Following the IPO process, a SPAC has a limited amount of time usually between18 to 24 months to identify a target and complete the acquisition. Once acquired, the founders will profit from their stake in the new company, while the investors receive an equity interest according to their capital contribution.