What are Special Purpose Acquisition Companies?

By Thapelo Moribame

Head of Market Development, BSE

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

A Special Purpose Acquisition Company (SPAC) or in the case of the Botswana Stock Exchange, a Special Acquisition Company (SAC), is a company with no existing commercial operations, but is formed strictly to raise capital on the stock exchange for the sole purpose of acquiring assets. In short, a SPAC is a publicly traded shell company with no operations of its own, with a specific mandate to acquire other companies or even merge with them.  Also known as ‘blank cheque companies’, SPACs have been around for some time, but their popularity in 2020, particularly in the United States, has ensured that they attract large investments. A SPAC is considered to be a modern and sophisticated way of raising capital and requires the leadership of knowledgeable individuals because they have a limited time in which to make acquisitions or to merge with other companies, and to satisfy the basic conditions for listing on an exchange. The COVID 19 pandemic may also have something to do with the boom of the SPAC IPO market, because with no need to conduct an extensive physical road show, sponsors have used it as an easy way to reach new investors and raise capital during the pandemic. According to the Harvard Law Review, ‘in 2019, 59 SPACS were created, with $13 billion invested; in 2020, 247 were created, with $80 billion invested; and in the first quarter alone of 2021, 295 were created, with $96 billion invested. Then there’s this remarkable fact: In 2020, SPACs accounted for more than 50% of new publicly listed U.S. companies’. In the past, sponsors have used SPACs to raise capital in a quick IPO based on the strength of a high-profile and well-regarded management team that is knowledgeable and experienced in a particular industry. Furthermore, SPACs have not been industry specific, because they have been used to raise capital for a wide range of businesses that span across various sectors. How does a SPAC work? Following an IPO, proceeds from a SPAC are placed into a trust account for future acquisitions or mergers, and must be deployed to acquire a specific business, within a requisite time, generally up to two years. In the event that the shareholders of a SPAC are not able to reach a consensus on the proposed acquisition or the SPAC term within which such acquisitions should have been made expires, then the capital initially raised must be handed back to investors according to the set criteria. One might ask what the incentive is for the initial investors of a SPAC during the SPAC term before the acquisitions are made. Normally, they are initially issued with warrants to incentivize them to subscribe for the IPO, as well as to vote in favour of the proposed mergers or acquisitions. In the case of sponsors, they are issued with founders’ shares.

• 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.