Key considerations when sponsoring a SPAC

BY , Michael A. Smith

The SPAC market is experiencing an upswing in activity. The following SPAC checklist is an important read for businesses and investors considering SPAC sponsorship in 2021.

Strategy: Is the SPAC a part of your capital markets strategy? How will the investment capital be used? As co-investment for large transactions? As an exit for other portfolio investments? It is important to identify an industry and/or geography sector for the SPAC; 

Branding: Can you assemble a high profile, reputable management team for the SPAC, that are considered leaders in their industry and work well together? The capital raised will be contingent on investor support for this team to attract and manage a going concern;

Key Advisors: Engaging an underwriting firm and a law firm with experience in SPAC offerings, relevant industries, SPAC mergers, and PIPEs is critical to timing the market, pricing, sizing, and deal execution;

Capital Structure: SPACs are typically awarded a 20% “free carry” by way of being issued founders shares worth 20% of the equity of the SPAC, post IPO and pre-merger. Units of a SPAC, consisting of shares and warrants are issued to investors in the IPO, as well as to PIPE investors. Most of the capital raised in the IPO will be placed into trust to be used for the merger, and returned if the merger is voted down; 

Sponsor Economics: A SPAC sponsor will hold 20% of the equity of a post IPO SPAC and a significant percentage of any post-merger business and be subject to a lock-up period. Have the economics of this ownership been properly agreed to and negotiated among shareholders of the SPAC sponsor? Will co-sponsors be brought in to share the “at risk capital”?

PIPEs: A key consideration for any SPAC sponsor, and its underwriter, is the ability of the SPAC to raise money privately from additional investors to support the announced merger. Be prepared for this round of capital raising;

Expenses: Have you identified all expenses in connection with the SPAC’s IPO on Form S-1 filed with the SEC? It is important to identify the “at risk capital,” that is, the expenses that will not be recouped if the SPAC fails to merge. These “at risk expenses,” typically include D&O insurance, legal fees, accounting, printing, and road show fees, as well as half of the underwriters’ commissions.

Tax: The SPAC merger will be a reverse takeover and SPAC shares will be issued in exchange for target shares. Also, increasingly, foreign businesses are using SPACs to go public in the US. Does the SPAC have sophisticated international and U.S. tax advisors?

Risks and Fiduciary Obligations: A SPAC is a public company listed on a U.S. stock exchange. An S-1 registration statement/prospectus will be filed with, and reviewed by, the SEC. An S-4 registration statement/prospectus will be filed with, and reviewed by, the SEC when the merger occurs, containing projections and material disclosure of the merged business. Is the SPAC target ready to go public? Are the SPAC insiders, directors, and officers fully aware and briefed on all their statutory and fiduciary obligations during the SPAC process? Will the SPAC, its insiders, officers, and directors comply with all conflicts, and accounting and corporate governance rules and treatment?

Please reach out to us, Andrew Goodman, or your Nixon Peabody attorney with any questions you might have or to discuss how we can assist in meeting your SPAC ambitions.

Tags: SPAC

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Richard F. Langan, Jr.


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Michael A. Smith


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