Special purpose acquisition company (SPAC)

SPACs

Special purpose acquisition companies (SPACs) have recently gained in popularity with investors wishing to raise capital through an IPO. They have created an alternative path to liquidity for investors and businesses anxious to avoid a long (and costly) IPO process.  Although faster than traditional IPOs, a SPAC listing can still be complex.  We can help you navigate that process effectively. 

Our experienced professionals provide the support you need throughout the required steps, from structure formation to target acquisition and IPO.

Why SPACs

SPACs are a faster—and, arguably, less risky—path to going public, especially for small to mid-sized companies without a strong IPO story to tell.

SPACs offer investors a path to involvement in interesting, often undervalued companies outside of a formal IPO or funding series. For sponsors, SPACs provide a permanent capital vehicle, a more diverse set of targets, and liquidity options.

Our services include:

Structure formation

During the entity formation stage, the SPACs structure and management team are established and the entity is registered as a company. Applications are subsequently made to the relevant regulatory body (for example, CSSF or SEC); auditors, legal counsel and investment bank are appointed; and a trust/escrow account is opened, ready for the day of IPO. The prospectus for the SPAC is drafted and once approved, the capital raising phase begins.

How can IQ-EQ help?

  • Drafting customised SPAC and SPAC sponsor launch checklist
  • Conducting the launch call with client (and counsel) to review status of all launch items and annotate the launch checklist accordingly
  • Reviewing all materials created or started prior to IQ-EQ engagement and update as necessary
  • Assisting in evaluating and selecting key service providers
  • Preparing and filing certificate(s) of formation/incorporation
  • Preparing and filing any foreign out-of-state certificate of incorporation (if applicable)
  • Obtaining U.S. tax EIN, VAT identification number, LEI registration
  • Coordinating with legal counsel in drafting by-laws 
  • Preparing articles of incorporation and any other related governing documents
  • Initiating trademark registration (if applicable)
  • Producing and maintaining a website for the SPAC
  • Obtaining EDGAR codes and CUSIP(s) (for US domiciled SPACs)
  • Assisting in obtaining exchange listing
  • Preparing the initial registration statement (i.e., Form S-1/Prospectus)
  • Working with legal counsel in reviewing and drafting responses to comments from relevant authorities
  • Working with counsel in preparing board books for initial board meeting (i.e., board meeting agendas, board resolutions, minutes, etc.)
  • Providing audit assistance and prepares (interim) financial statements
  • Providing CFO support services

SPAC and IPO

During the second stage, the SPAC company is listed on relevant stock exchange by the underwriting bank and is now a publicly traded company.

How can IQ-EQ help?

  • Carrying out quarterly reporting
  • Preparing annual accounts and mid-year accounts including audit support
  • Facilitating and assisting with treasury (i.e., cash management/movements and cash controls of the SPAC)
  • Preparing, attending and taking minutes of the board meetings
  • Preparing and maintaining accounting books and records (i.e., cash journals, ledgers, accruals, trial balances, etc.)
  • Recording transactions
  • Scheduling payment of invoices – expense processing and bill payment
  • Preparing Form 1099s
  • Assisting in and overseeing the preparation of draft regulatory and financial reports
  • Overseeing the preparation of draft financial statements for audit, and the tax return preparation
  • Coordinating the timely preparation of tax returns with tax preparer
  • Reviewing and helping facilitate tax filings
  • Conducting relations with custodians, trust depositories transfer agents, other stockholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable

 

Target Search and Acquisition

After the IPO, proceeds are credited to the SPAC’s trust/escrow account, where they are blocked until acquisition of the target company.  The SPAC management team then seeks potential targets.

How can IQ-EQ help?

  • Assisting in the day-to-day SPAC operations, managing all operational relationships of the SPAC
  • Working with counsel on drafting and preparing board meeting materials (i.e., board meeting agendas, board resolutions, minutes, etc.)

Shareholder vote, approve and merger

Once the SPAC management team and the shareholders of the acquisition target company have agreed to merge, the SPAC shareholders (IPO investors) approve the envisaged acquisition.

How can IQ-EQ help?

  • Preparing, attending and taking the minutes of the extraordinary shareholders meeting

Entity now public / PE exit option

After the shareholders’ approval, the acquisition takes place and the acquired company is merged into the SPAC, thus becoming a listed company.  The “de-SPACing” of the original entity begins.

How can IQ-EQ help?

  • Assisting throughout the de-SPACing process
  • Providing administration and a fully-fledged service to the newly formed listed entity.

FAQs

What is a Spac?

SPACs are essentially shell companies that initially have no commercial operations, formed solely to raise capital through an IPO. Before a SPAC has a specific target (an existing privately held company) in mind for acquisition, it raises funds through a public offering of the SPAC’s equity securities. The SPAC sponsors usually retains 20% of the post-IPO SPAC. Capital is then placed into an escrow account until the SPAC acquires a target company.

This process is called a “business combination,” and a SPAC typically has up to two years to acquire a target in such a combination (though specific rules vary by country and legislation). If the SPAC can’t acquire a suitable target within that time, money is returned to the investors.

What makes SPACs so appealing for Private Equity?

With their experience in deal origination, financing, and value creation, private equity firms are natural allies of the SPAC structure and model—and indeed, PE-backed SPACs make up about 10% of the SPACs raised over the past year and a half. 

What are the advantages SPACs offer private companies compared to traditional IPOs?

  • More streamlined and faster IPO process
  • Lower financial transaction costs
  • Greater control over deal terms
  • Access to sponsors’ management expertise
  •  Greater market certainty
  •  More access to capital
  •  Fewer disclosures to investors at the time of the IPO

More than anything, SPACs have created an alternative path to liquidity for investors and businesses anxious to avoid a long (and costly) IPO process. Going public has always been a challenge, but markets were especially volatile during the 2020 pandemic, and companies were understandably anxious about how those ups and downs would impact their listing. SPACs are a faster—and, arguably, less risky—path to going public, especially for small to mid-sized companies without a strong IPO story to tell.

SPACs also offer investors a path to involvement in interesting, often undervalued companies outside of a formal IPO or funding series. For sponsors, SPACs provide a permanent capital vehicle, a more diverse set of targets, and liquidity options that aren’t always available to a traditional PE portfolio company.

Finally, they’re a straightforward way to make money, including a sort of “money-back guarantee” that’s rare in the world of PE. If the SPAC doesn’t identify a target company within 18-24 months, investors are entitled to a return of their investment. And because investment capital is held in trust before the SPAC acquires a target, investors can choose whether to reclaim their investments (including interest) or convert their shares into a stake in the merged company.

How does Private equity view Spacs?

In the world of high-risk, high-return investment, competition is nothing new. PE firms have been competing for high-quality assets since well before SPACs exploded onto the scene. But there is undoubtedly potential for overlapping targets between SPACs and PE firms, and PE firms have expressed justifiable concern about the impact SPACs could have on deal flow and valuations.

Existing SPACs are on track to announce deals valued at more than US$800 billion over the next two years. (Compare that to an average year for private equity, which might see something between $500-$550 billion in deal value.) That’s a tremendous amount of capital for the private equity world to digest, particularly since institutional investors have grown more cautious as the market continues to fluctuate which usually result in more difficulty to access capital calls.

But studies indicate that SPACs might be more opportunity than threat for PE firms. Only 8% of fund managers surveyed in November 2020 for Preqin’s 2021 Global Private Equity & Venture Capital Report said they had competed with a SPAC for an acquisition, and just 1% of those had actually lost out on a deal. Surprisingly, 64% of respondents said that SPACs had no impact on their business at all.

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