The SPAC is back: going public in a pandemic

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According to Axios, the first half of 2020 saw special purpose acquisition companies (“SPACs” for short) in the U.S. raise over US$20 billion, easily eclipsing the US$13.3 billion raised in all of 2019. A SPAC is a special purpose vehicle that does not have any assets or operations, but exists solely for the purpose of raising money in the public markets with the aim to acquire an operating business (or several businesses). Of the recently launched SPACs, many are run by well-known investors who bring substantial amounts of capital and experience to the SPAC with them.

Even in the best of times, taking a company public can involve a considerable amount of uncertainty. Although markets have largely recovered from their late-March collapse, investors may still be cautious, especially if more market volatility is expected in the near or mid future. Because SPACs can blend some features of an IPO (mainly, access to the public markets) with some features of a private equity investment or strategic merger (being seasoned management teams keen on seeing the business succeed), SPACs are becoming increasingly attractive in these uncertain business conditions.

The case for SPACs

With the uncertainty due to the COVID-19 pandemic, SPACs are increasingly making financial and business sense, both for investors and for potential target companies. Here are some of the reasons why:

  • Deal certainty: In a traditional IPO, the issuer begins the IPO process before knowing how many investors it will have, or whether investors will be interested at all. In volatile markets, issuers run a real risk that a sufficient level of investment could fail to materialize. A SPAC allows the target company to negotiate with just one counter party, and consequently the single counter party would have a single investment objective and a single view of the value of the business.
  • Price certainty: Similarly, the IPO price is fixed relatively late in the IPO process. Even if key investors don’t pull out in the event that markets go sour, they may demand a lower price which could dramatically reduce the amount of money that the issuer can raise. While this risk is not eliminated in the SPAC process, an issuer negotiating with the SPAC again has the benefit of negotiating with a single counterparty that controls a pre-established pool of capital and can take a longer-term view of the investment.
  • Experienced investors: Increasingly, new SPACs are being launched with the backing of high profile and experienced hedge fund and private equity investors. As opposed to a traditional IPO where an issuer generally sells its shares to a broad base of often passive investors, a SPAC gives target companies an opportunity to add or “partner with” experienced executives who may be willing to take a more active role in the business.

SPACs in Canada – TSX SPAC vs CPC

In Canada, SPACs can generally exist in two forms: on the TSX under its Special Purpose Acquisition Corporation (“TSX SPAC”) program, or on the TSX Venture Exchange under its Capital Pool Company (“CPC”) program.

TSX SPACs and CPCs follow the same general formula. First, the TSX SPAC or CPC is incorporated as a shell company, which then completes an IPO and becomes listed on the TSX or TSXV as applicable. Following the IPO, the newly public company must then search for an acquisition target (or targets) and complete a “Qualifying Acquisition” (“QA”) in the case of a TSX SPAC or a “Qualifying Transaction” (“QT”) in the case of a CPC. Between the IPO and the QA/QT, the issuer is subject to strict restrictions and is generally only allowed to use its funds for purposes that advance a QA or QT as applicable. Once a QA or QT is completed, the restrictions fall away and the issuer becomes a normal public company.

Some key differences between the TSX SPAC and CPC programs include:

  • Capital structure: A TSX SPAC may only issue shares or units in its IPO (each unit consisting of one share and a maximum of two warrants). Meanwhile, CPCs may only issue common shares in an IPO. Between its IPO and QA, a TSX SPAC is generally only permitted to raise additional funds by way of a rights offering, while a CPC may only raise additional capital by way of a private placement of common shares. CPCs may raise an aggregate maximum of $5 million from seed investments, IPO proceeds and subsequent private placements. Despite those restrictions, both types of entities are generally not restricted from issuing additional securities as part of a QA or QT.
  • Financial terms: A TSX SPAC is required to raise a minimum of $30 million in its IPO at a minimum price of $2 per share or unit while a CPC may raise between $200,000 and $4.75 million at a minimum price of $0.10 per share. The founders of a TSX SPAC or CPC are generally permitted to invest seed capital on more favourable terms. A QA must generally have an aggregate fair market value of at least approximately 72% of the funds raised in its IPO and any subsequent rights offering. CPCs are given slightly more latitude as a QT is defined as any transaction that would cause the CPC to meet any of the TSXV’s original listing criteria.
  • Shareholder approval: Generally, a TSX SPAC is required to seek shareholder approval before closing a QA although a limited exemption from this requirement exists where the TSX SPAC puts all funds raised in the IPO and any subsequent rights offering in trust (meaning all pre-QA expenses must be paid out of the founders’ investments). Additionally, all non-founding investors in a TSX SPAC have the right to redeem their shares for a portion of the funds held by the TSX SPAC if they are not happy with a proposed QA. CPCs have no such redemption mechanism and shareholder approval of a QT is generally only required if the QT is considered a non-arm’s length transaction.

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