ClevverBlog

Highlights
17th Jun 2021

Peculiarities of Corporate Financial Reporting in Germany

11th Jun 2021

Build up Your Business in Singapore with Clevver Online

09th Jun 2021

STO vs. ICO: Everything You Wanted to Know

10th Feb 2021

What Is a SPAC? Pros and Cons Of the Investment Tool

These days, a SPAC, or "Special Purpose Acquisition Company", is a constant feature in the stock exchange market news and there is a definite reason for it. The truth lies in the fact that SPACs provide a more simplified mechanism and needed flexibility for going public to private companies. To date, a number of more than successful SPACs have been formed (QuantumScape, DraftKings, Iridium, etc). In the year 2020, SPACs raised over $82 billion in the capital. This is more funds per year than in the last 10 years together.

SPAC. What Is This?

A SPAC is a specially created and granted known status company whose sole purpose of existence is to merge with another private organization. Such structures have no business plan, no history of development, a variety of assets, technology, etc. There is only investor money on the balance sheet which is raised through the SPAC IPO. These funds, in the future, must either be used to acquire part of the non-public business or yielded to the investors. The management of the SPAC structure typically consists of well-known people/companies who have established a name for them already.

To accomplish the supposed merger, a SPAC has a two-year period at most (18-24 months). Such structures are often called a "blank-check" because it is never known in advance with which company the merger will take place.

Why use SPACs? The thing is that the process of going public via IPO is quite complicated and costly, and direct listing still does not allow most firms to raise new capital for development. A graceful way out of the situation is SPAC structures, which independently pass the IPO process, and then "wait for their time" to find a suitable candidate for a merger who wants to go public but does not have the ability or desire to make an IPO itself. The stock chart of the special acquisition companies prior to the announcement of a possible merger deal is usually a flat, horizontal line.

How SPACs Function

So, let's briefly describe the basic steps of setting up a SPAC:

  • In the first stage, one or more sponsors express a desire to create a SPAC. More often than not, these are well-known personalities/companies who have already made a name for themselves. This is a crucial point for investors to confide in the sponsors, because in fact, by participating in a SPAC investors are buying a "pig in a poke".
  • Then, a SPAC independently passes the entire IPO procedure according to the regulations of the SEC (US Securities and Exchange Commission). All costs, which will not be returned, the sponsors the special acquisition company take on themselves.
  • In the SPAC IPO, already investors participate. From that moment on, the company has money on its balance sheet, which is placed in an escrow account, after that it can only be used to acquire a new business or be returned to investors. The latter themselves have shares (most often at $10 a share), and usually warrants — papers that give the right to additional purchase of SPAC shares at a predetermined price.
  • Now, it is time to wait and find an organization to merge with. The SPAC structure most often has 18-24 months to complete the merger. If the deal does not go through, the investors get their money back, and the SPAC ceases to exist. The sponsors suffer losses (IPO costs), and they also lose investor trust.
  • If a potential option is found, then the merger procedure begins. A SPAC is obliged to spend at least 80% of the funding raised in the course of the IPO. The company, which intends to go public, conducts an additional issue, which is purchased by the SPAC-structure (a part goes to the sponsors themselves), after which the shares of the issuer are transformed into the SPAC securities with a ratio of 1:1. Then, the SPAC just changes the ticker and that's it. The process of becoming public is complete.
  • From that point on, the SPAC-company chart no longer looks like a horizontal line (in reality, it happens earlier — when the SPAC only declares the intention to conduct a deal). The usual bidding starts, where the market forms the price, which may differ significantly from the initial $10, either upward or downward. It all depends on the quality of the "absorbed-to-be'' business. There is usually no lockup period. SPAC investors are free to sell their shares.

Advantages of SPACs

It has been mentioned before that buying SPAC stocks could be like a "cat in the bag." You can never predict in advance where exactly the funds will be invested. This is true as well as the fact that there are numerous reasons why it’s still worth it to use this investment tool.

Why Would Private Companies Use a SPAC?

The answer is simple — to save money and time. An IPO entails the involvement of underwriters, an investment memorandum, etc. With a SPAC, it's all much simpler. Of course, with such a method of coming to the stock exchange, one must fulfill a number of regulatory requirements as well as bear financial expenses, but all of them are much more "pleasant" for companies in comparison with the IPO process. In addition to more affordable listing procedures, a SPAC allows businesses to go public in a very short timeframe.

Why Do Investors Need It?

For investors in SPACs, there is a real possibility of tens or hundreds of percent return on successful transactions, but this all depends on the original sponsors (the SPAC management).

In addition, the absence of a lock-up period is attractive — there is no need to wait three months to sell the shares, as is the case with IPOs.

So, the main advantages of SPACs are:

  • There is a strict period of validity of the SPAC (18-24 months);
  • Investors have the right to refuse the proposed choice for the merger, and to demand a full refund of the invested funds;
  • In most cases, a merger with a SPAC is faster and cheaper than a traditional IPO because the SPAC has already provided funding and most of the regulatory work.

Clevver can help with all the necessary documents for creating a SPAC structure. Our experts can make the process of creating a SPAC and going public even easier by taking on ourselves the paper- and regulatory work.

Clevver and SPACs. We Have You Covered

Investors in SPACs seek to combine the skills and knowledge of an experienced management team with a functioning business that has the potential to grow and become a publicly-traded enterprise but does not have the funds or experience to do it on its own. Many private organizations use the SPAC structure to become public companies. Сlevver has the capabilities and high-level expertise to help with the setting up of a SPAC.

Like other complex financing and acquisition arrangements, SPACs face many hurdles in IPOs and subsequent business combinations. However, with prudent planning and the help of a highly skilled SPAC management team that is Сlevver specialists, excellent results can be achieved.

What Clevver Offers:

  1. We provide an individual approach. Each customer case is a unique consultation project;
  2. Our company does everything SPAC related;
  3. We guarantee the listing on the stock exchange market (USA, Europe, and Asia);
  4. With us, it takes only 9-12 weeks to get listed!!!

The positive outcome of the SPAC campaign depends on the right, masterfully planned management, which in the end can be obtained by cooperating with our company!

Final Thoughts

It is clear that the SPAC tool is now gaining in popularity among investors seeking high yields and companies wishing to “easily” go public. In addition, the scale of SPAC deals is also gradually increasing. In July 2020, Pershing Square Tontine Holdings, owned by Bill Eckman (billionaire investor), raised $4 billion. It is one of the largest SPAC-campaigns to date.

Meanwhile, SPAC deals might be risky and fail to meet investors' expectations. Is it worth it to participate in them? That's an open question. What can be said for sure is that the key to a successful SPAC deal is the reliability and professionalism of the sponsors — the SPAC management. The Clevver company has an excellent reputation and good abilities to set up a SPAC and complete the merger. Contact us for a consultation to learn more.