Key Considerations Before Using SPAC to Go Public
In recent times, Special Purpose Acquisition Companies, better known as SPACs, have gained immense popularity as an alternative route for private companies to go public. The benefits of SPACs lies in their speed, reduced regulatory burdens, and access to capital markets.
However, before jumping on the SPAC bandwagon, it’s essential for both private companies and investors, especially those in Singapore, to understand the nuances, advantages, and potential pitfalls associated with this method of going public.
Understanding the Basics of SPACs
At its core, a SPAC is a shell company created by seasoned investors, celebrities, or business figures. Unlike traditional operating companies, SPACs have no commercial operations, products, or services.
Instead, their primary purpose is to raise capital from public investors and then use that capital to acquire or merge with a private company, effectively taking it public.
The SPAC Timeline
The journey of a SPAC involves several phases. It begins with the creation of the SPAC, followed by raising capital from public investors. The SPAC then embarks on a quest to find a suitable private company for acquisition, leading to a deal announcement.
Shareholders of the SPAC have the option to vote on the proposed merger, and they can also redeem their shares for their initial investment plus interest if they disagree with the chosen target. If the merger is approved, the private company becomes publicly listed through the SPAC.
Advantages of SPACs Over Traditional IPOs
SPACs offer several advantages over traditional initial public offerings (IPOs). Notably, they are quicker to execute, often closing in just a few months compared to the potentially lengthy process of an IPO, which can take up to a year.
Additionally, SPACs provide more flexibility in marketing and pricing. Companies have a more extended pre-merger period to present forward-looking projections and gain deeper insights into potential investments.
Moreover, SPACs come with operational expertise. Sponsors of SPACs bring industry experience and a network of contacts that can benefit the target company. This expertise can be valuable for companies looking to navigate the transition to the public markets successfully.
Risks Associated with SPACs
While SPACs offer enticing advantages, they are not without risks. Companies considering going public via SPAC should conduct thorough due diligence on the SPAC itself, its management team, and its financial sponsor. Some of the potential risks include:
SPAC sponsors typically own about 20% of the SPAC, which can lead to shareholder dilution, particularly if additional shares are issued.
Capital Shortfall from Redemption
If too many shareholders decide to redeem their shares, the SPAC may face a cash shortfall. In such cases, SPACs must secure Private Investment in Public Equity (PIPE) financing to cover the gap.
Investment Withdrawal Risk
Investors can withdraw their investments if they disagree with the chosen target company, potentially causing the SPAC to abandon the deal.
Due Diligence Risk
Unlike public companies, SPACs don’t have the luxury of trial runs. Any mistakes made before the merger can have serious consequences, so thorough preparation is crucial.
Compliance Considerations for Private Companies
When a private company merges with a SPAC and goes public, it must adhere to state law compliance requirements, which include filing the Articles of Merger, obtaining necessary documents, updating licenses, and making public filings as needed.
Why Privates Are Choosing SPACs
Private companies are increasingly drawn to SPACs due to the improved reputation of this method. Unlike in the past, SPACs now offer investor protection measures, making them more attractive to established companies. The increased market volatility and the desire of retail investors to invest in high-growth companies are also driving factors.
How SPACs Work in Practice
SPACs are typically formed by sponsors, who identify and negotiate with potential acquisition targets. Once a target is found, SPAC shareholders vote on the acquisition, with those approving becoming shareholders in the combined company.
Advantages of SPACs for Private Companies
For private companies, including accounting firms in Singapore, SPACs offer a faster route to the public markets, often with lower banking fees and reduced dependence on market conditions. The strategic partnership with SPAC sponsors can also be beneficial, providing ongoing expertise and support.
Disadvantages of SPACs
Despite the advantages, SPACs may yield poor returns for investors once the company goes public. Additionally, companies must be prepared to meet compliance and regulatory requirements, which can be daunting. The sponsor’s “promote” and associated fees can also impact the deal’s economics.
In a Nutshell
While SPACs provide an attractive path to going public, they come with their share of complexities and risks. Private companies and investors alike must carefully consider these factors before embarking on the SPAC journey.
Whether a private company chooses SPACs, direct listings, or traditional IPOs, having experienced guidance, such as from accounting firms in Singapore, can make all the difference in achieving the best outcome.