2020 has been the busiest year for special-purpose acquisition companies (SPACs), helping private companies in buzzing markets such as space travel, electric vehicles, cannabis, and online gaming go public without the constraints of the traditional initial public offering (IPO) process. SPACs have raised more than $67 billion in 2020 and are expected to represent at least half of the initial public offering (IPO) market by the end of this year.
What is a SPAC?
SPACs are publicly traded shell companies, also known as blank-check companies, formed to pursue deals through which a privately held business can get a SPAC’s spot on a stock exchange via a reverse merger, making shares available to the public. SPAC founders receive founder shares, and those shares can only be cashed if a deal occurs. If a deal happens, SPAC founders can sell for a gain or redeem shares versus accepting the merger. Once capital is raised and added to an interest-producing trust account, a SPAC can seek to “acquire” a private company seeking to go public.
Despite some of this year’s SPAC targets posting no revenue last year, according to filings investigated by the Wall Street Journal, SPAC deal growth does not appear to be slowing down any time soon. As of November 23, 2020, SPACInsider reports that 193 SPAC deals were announced in this year alone compared to just 59 in 2019.
SPACs have become a tool for some companies to go public that might not have been marketable through a traditional IPO due to complicated business history or unprofitable operations, and making such forecasts can position startups for massive valuations. For example, electric-car company Fisker Inc. went public via a SPAC this October. Representatives from the company told SPAC management that its financial projections put revenue at $13.2 billion by 2025, yet the business has not generated any revenue to date. The WSJ reports that Fisker Inc. has “ridden a wave of investor enthusiasm to a market capitalization of more than $4 billion.”
The proliferation of SPACs has attracted quality investors and strong private companies well positioned for IPO. However, SPACs can also be an opportunity for first-timers or those with questionable track records looking for easy money, making reputational due diligence a necessity for underwriters.
Due diligence for SPAC principals
Putting investment dollars into a SPAC is not so much investing in a business idea as it is investing in the people managing the SPAC and its future acquisition. Therefore, Vcheck Global recommends a comprehensive review of public records to ascertain the reputation, track record and professional competencies of individuals slated to be executives or on the board of directors of any SPAC. This includes litigation and negative media associated with past corporate affiliations, confirmation of credentials, and a full review of litigation, regulatory, and media to paint a complete picture of the individuals being considered. Given the current economic climate, Vcheck Global also recommends paying particular attention to what these individuals were doing after the 2008 economic crisis and how their current and previous businesses fared during the recovery.
Given the uncertainty in the current economic climate and the huge sums SPACs are currently generating, it is more important than ever to gather intelligence, identify potential risks, and prevent bad deals from costing investors and businesses millions of dollars or more. To learn how Vcheck Global can help with SPAC due diligence, contact us here.