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Private-Company CFO Considerations for SPAC Transactions

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SPACs have recently come into vogue as seasoned investors and management teams have turned to SPACs to mitigate the increased market volatility risk of traditional IPOs.

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Although special-purpose acquisition companies (SPACs) have been used for decades as alternative investment vehicles, they have recently come into vogue as seasoned investors and management teams have turned to SPACs to mitigate the increased market volatility risk of traditional initial public offerings (IPOs). In fact, 2020 has been a record-breaking year for SPAC IPOs; the proceeds raised in the first eight months of the year have already more than doubled those raised in 2019. This surge has been driven by the influx of high-profile investors and management teams entering the SPAC space, coupled with an abundance of uninvested capital that had largely been sitting out in the first half of 2020. However, SPAC transactions come with their own set of unique challenges, and it is essential for entities to have (1) an understanding of the risks associated with these investment vehicles and (2) a comprehensive project management plan to meet the demands of an accelerated merger timeline.

Recent market volatility, combined with the arrival of seasoned sponsors and management teams, has created a modern-day SPAC revolution. The abundance of funds held in trusts and the increased appetite for private investment in public equity (PIPE) transactions have thrust SPACs beyond the fringe of capital markets and into the mainstream as significant players for potential sponsors, investors, and target operating companies.

A SPAC is a newly created company that uses a combination of IPO proceeds and additional financing (PIPEs have been common in recent times) to fund the acquisition of a private operating company. The proceeds raised in the IPO are placed in a trust account while the SPAC’s management team seeks to complete an acquisition of an existing operating company (“target”), generally in a specific industry or geography, within the period stated in the SPAC’s governing documents (typically, 18 to 24 months). If the SPAC successfully completes an acquisition, the private operating company target succeeds to the SPAC’s public filing status and, as a result, the target effectively becomes a public company. If the SPAC is unable to complete an acquisition in the allotted timeframe, the cash held in its trust account is returned to its investors unless the SPAC extends its timeline via a proxy process.

Entities with characteristics similar to those of SPACs have existed for decades in various iterations as “blank check companies” or “public shells.” The term “SPAC” was coined in the 1990s, with sponsors focusing on the technology, media, and health care industries. Since then, the popularity of SPAC offerings has ebbed and flowed, depending on economic conditions, trends in capital, and the general health of the IPO market. For example, SPACs gained popularity in the oil and gas industry in the mid-2010s as depressed commodity prices drove investors toward experienced management teams that were increasingly likely to find existing operating companies or mineral rights for a discount. The number of SPAC IPOs has increased steadily since 2013, and 2020 has been a banner year in terms of the volume and size of SPAC IPOs.

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