The Process, Timeline, Benefit and Structure of SPACs

SPAC Merger Process:

There are two critical components to complete a successful SPAC merger. The first part is for the SPAC to go public, and the second part is for the SPAC to locate an operating company and merge with it. The key players in the process include the SPAC sponsor, the SPAC management team, SPAC investors, and the target company.

The process for a SPAC to go public is very similar to a traditional IPO process. The typical process of a SPAC going public on NASDAQ or NYSE include the following:

  1. The SPAC sponsor and management team engage an investment bank, legal counsel and auditors;

  2. Incorporate SPAC and sell founder shares;

  3. Prepare S-1;

  4. File S-1 and amendments responsive to SEC comments;

  5. Negotiate underwriting and ancillary agreements with investment banks;

  6. Roadshow, pricing and closing.

The second step for a SPAC merger is to locate an operating company, conduct the due diligence, and obtain approvals from the SPAC Board and investors to conclude the merger:

  1. A SPAC needs to identify a target company within 18 to 24 months (deal specified) while filing regular periodic SEC filings as a public company;

  2. The SPAC management team will conduct due diligence and negotiate the acquisition agreement with the target company;

  3. The SPAC management team potentially will arrange committed PIPE and/or debt financing to increase the funding available to close the deal;

  4. Begin preparing proxy/tender offer document;

  5. The SPAC team and the target company sign the acquisition agreement and financing commitments, and make the necessary public announcements;

  6. Conduct roadshow(s) of the target company to investors;

  7. Obtain shareholders’ approval of the transaction or return to target company search.

  8. Redeem public shares of electing holders;

  9. Transaction close;

  10. File Super 8-K;

Timeline for a Typical SPAC Merger Process

Brief Summary of Contributions & Payback for Key Players in a SPAC

Contributions & Payback:

Each key player receives unparallel benefits through a SPAC transaction. For the sponsor of a SPAC, by putting around 5% worth of IPO value of capital “at risk”, they are looking for rewards in various areas:

  1. Pre-funding an acquisition strategy;

  2. Raise money through secondary market;

  3. Greater flexibility than with traditional private equity;

  4. Better economics for sponsor/management (receive 20% of the SPAC shares);

  5. More credibility with target company with capital in the trust account;

  6. Ability to leverage capital in trust account and fund larger acquisitions.

The SPAC investors’ benefits are mainly reflected in terms of access to private equity market deals and expert management teams, as well as limited level of risk:

  1. Access to investments in acquisitions and buy-outs typically otherwise restricted to private equity funds;

  2. Investing with a SPAC sponsor and management team who have seasoned industry experiences;

  3. Limited Risk:

  • Capital held in a trust account pending approval of business combination via a shareholder vote or return of capital via tender offer (stockholders can redeem their shares of common stock for cash upon completion of the business combination);

  • Liquidity of publicly traded securities and ability to control exit timing;

  • Pending business combination status means no cash compensation to management team/sponsor;

  • Warrants enable investors to invest more capital at a pre-determined strike price;

  • Provides a minimum liquidation value per share in the event no business combination is completed within the allowed time frame;

As for the target companies, getting publicly listed through a SPAC transaction is often more attractive than the traditional process:

  1. Faster funding (3-6 months for a SPAC merger, while 6-9 months for traditional IPOs);

  2. Ability to partner with well-known sponsor team;

  3. Potential to retain majority of upside by being paid in stock;

  4. Less turmoil to their management team and employees than traditional IPO.

Typical SPAC Structure $10.00 per Unit

SPACs are getting popular among specific and niche sectors, and the number of SPACs with out-of-the-money warrant strike price is also surging, as it tries to fully utilize available capital. In the next episode, we will be talking about the latest trend of SPACs and what it means to healthcare and overseas companies looking to be listed in NASDAQ or NYSE.

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