Stakes are high for hundreds of special purpose acquisition companies (SPACs) holding investor funds that must be used to complete mergers with private companies and take them public before their window of opportunity runs out.
As shell entities listed in public stock exchanges formed with the intent to use investor funds to complete IPOs for acquired private companies, SPACs and their management teams must act swiftly as a two-year time clock begins ticking down from the moment they take on investor funds. Pressure to “de-SPAC”—merge a private company with a SPAC to go public—is creating some additional risk on top of the inherent to these deals, requiring critical evaluation of risk areas in any potential merger.
Consider this: in the four years between 2016 and the end of 2019, only 104 de-SPAC transactions were announced. Starting in 2020, SPACs became a preferred route for IPO in the U.S. According to SPACInsider, the number of SPACs jumped from 59 in 2019 to 252 in 2020 and now 637 so far this year. Of those 637 SPACs active today, 314 are still searching for the right private company to take public—that’s nearly half, and while 288 SPACs have filed for IPO, only 1 has been completed thus far.
Given the short time window to de-SPAC, there is a rush to close deals or else have the entity languish and investor funds returned. The rush to merge is on top of the unprecedented number of SPACs in today’s market, creating significant competition. The number of suitable U.S. targets for SPACs is diminishing, driving SPAC teams to look overseas for IPO prospects and thereby creating a new layer of risk to be evaluated in the due diligence process.
The impetus to de-SPAC is driven by the race to the finish line, a timed marathon that requires trusted, experienced participants who can successfully pass the proverbial baton. Yet for many of the new SPACs formed since 2020, this is their first time taking a company public. Having the right due diligence team providing clarity on the path to IPO is critical.
Moreover, de-SPACs have recently come under scrutiny from the U.S. Securities and Exchange Commission (SEC), specifically examining the rules around financial projections. Financial projections made in a de-SPAC are not covered by the Private Securities Litigation Reform Act of 1995 (PSLRA), which means any forward-looking projections made for a soon-to-be public company via a de-SPAC transaction are not awarded the same liability protections given for financial projections made as private companies. This interpretation of the PSLRA was seemingly reinforced based on statements made in April by current Acting Director of the SEC David Saltiel, and the SEC is expected to release new guidance soon.
Vcheck Global has years of combined experience in M&A and now SPAC due diligence, helping SPAC sponsors in search of the right deal over the past year to properly investigate and report on potential acquisition targets. Avoiding being part of a possible SPAC liquidation due to inability to de-SPAC means finding a private company and performing the necessary due diligence to get the deal done quickly and efficiently. If you’re involved in a SPAC and need to vet private companies that you may wish to help take public, Vcheck Global’s team of skilled investigators are ready to assist. Contact us here.
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.