Even though SPACs have been around for decades, over the past year they have shaped the M&A and IPO markets in a big way. Indeed, there has been a historic spike in the amount of capital raised by utilizing SPACs. In the first quarter of 2021, some $166 billion worth of deals were closed via SPAC acquisitions — approximately 30% of all M&A deals (by value) during this period.

As a law firm professional, you may have experienced the recent surge in demand from your clients for SPAC-related services. In this article, we explain the basic concept of SPACs and implications for legal entity structuring and deal-related requirements.

What is a SPAC?

SPAC stands for Special Purpose Acquisition Company. Also known as “blank check companies”, SPACs don’t have operations and are essentially a shell company in which an investor can hold money raised through an IPO before using it to acquire another company.

SPACs are created or sponsored by a team of institutional investors and Wall Street professionals. SPAC IPOs are usually priced at $10 per share. These funds are placed in an interest-bearing account until the SPACs founders or management team finds a private company that is looking to go public through acquisition.

Law firms may form a SPAC for their client so their client can use that entity to pull investors’ money as part of a strategic acquisition.

Why have SPACs become so popular?

The rise of the SPAC coincided with the onset of the pandemic. Volatile markets led many companies to postpone IPOs for fear that their stock would be detrimentally impacted.

But SPACs also offer many advantages that add to their appeal, such as control, speed, and ease of listing on the stock market, and greater certainty for founders wishing to go public. For instance, a SPAC merger allows a company to go public and access capital quicker than with a traditional IPO. Unlike the lengthy IPO process, which requires registering an IPO with the SEC, SPAC deals can be closed within a few months.

Another reason for the recent coverage of SPACs is due to interest from high-profile companies and investors like Richard Branson, Colin Kaepernick, and Shaquille O’Neal — further fueling broader appeal.

Despite this, the performance of SPACs in recent months has been disappointing and many firms and investors are growing cautious of the risks.

What are the risks of SPACs?

One area to watch is that disclosure rules for SPAC deals aren’t the same as those for IPOs. For IPOs, companies may share historical financial results and facts about their markets, but they can’t project future revenue and profit performance.

A SPAC deal, however, can present this forward-looking information for five or more years. This brings benefits to companies who want investors to concentrate on their potential rather than their pre-revenue state.

SPACS lack some of the protections of traditional IPOs. The IPO process is cumbersome precisely because it aims to protect investors. SPACs are not, which naturally introduces an element of risk.

Another risk of SPACs is that any acquisition, also known as an initial business combination opportunity, may be rejected by the SPAC’s shareholders.

Finally, the SEC has stepped up its scrutiny of accounting and growth projections for newly public startups. The commission is questioning optimistic revenue projections used by startups that are merging with SPACs. An SEC warning that could require some SPACs to restate their financial results put the brakes on some new offerings.

SPAC compliance considerations

As with any other M&A transaction, SPAC deals can be cumbersome to complete. UCC searches must be conducted, and documents gathered. Legal work continues post-transaction with the merger filing, name change filing, and re-domestication where needed.

With so many steps to take before, during, and after the merger and tricky timing issues every step of the way, it’s important to have the right support.