SEC Protections
The SEC has made several changes to SPAC regulations over the past decade to improve investor protections, attracting high-quality sponsors
Source: SEC filings. Includes only US Exchange listed SPACs as of November 17, 2020
A Special Purpose Acquisition Company (SPAC) is a publicly-traded company that raises trust-protected capital through an initial public offering (IPO) led by sponsor/founders for the purpose of acquiring or merging with one or more existing operating companies
A sponsor invests at-risk capital to cover the IPO and deal expenses and receives 20% of the resulting IPO shares
The sponsor raises capital in an IPO and gross proceeds are placed into trust until a SPAC identifies a business combination
The SPAC negotiates a merger with an operating company
Because public SPAC investors have the option to redeem their shares in trust, a SPAC often raises a PIPE (Private Investment in Public Entity) to close the transaction
Once shareholders approve the merger, the new company trades on public stock exchange
The SEC has made several changes to SPAC regulations over the past decade to improve investor protections, attracting high-quality sponsors
The amount of debt used by private equity firms has tripled over the past decade, leaving many companies highly-leveraged
The number of publicly-traded companies in the US has fallen by half in 24 years, while the amount of money going into public markets has grown 5x over the same period
Because companies owned by private equity firms are seeking exits totaling $2 trillion and current SPAC capital searching for targets is only $67 Billion, the SPAC market will continue to grow
Unspent Private Equity Dry Powder: $2 Trillion
Private Equity Portfolio Seeking Exits: $2 Trillion
SPAC Funds in Trust: $67 Billion
SPACs’ newfound prominence has led to some common misconceptions about them often quoted from parties just getting to know SPACs now.
We’re not new to SPACs, so we’ll clear up a few things below:
A Special Purpose Acquisition Company (SPAC) is a publicly-traded company that raises trust-protected capital through an initial public offering (IPO) led by sponsor/founders for the purpose of acquiring or merging with one or more existing operating companies.
The Securities & Exchange Commission (SEC) has made several changes to SPAC regulations over the past decade to improve investor protections, which have made SPACs more attractive. These changes include: (a) investors are entitled to receive 100% of their SPAC IPO proceeds placed in trust plus treasury returns, (b) the shareholder vote on approving the business combination is separated from individual redemption choices, and (c) investment bank underwriting fees now have a back-ended component and are not entirely upfront. As a result, SPACs have become larger and more mainstream, and the failure rate of SPACs has declined dramatically to less than 4%.
Compared to IPOs or direct listings, SPAC mergers offer a quicker process, fewer regulatory hurdles, and greater certainty—among the reasons SPACs have gained in popularity. For the investor, a SPAC IPO is attractive because you have the ability to redeem 100% of your investment if you don’t like the acquisition target or if the SPAC doesn’t identify a target. For an operating company, a SPAC offers access to public capital to reduce debt or fuel growth, without the traditional expensive and time-consuming IPO process.
SPACs saw a meteoric rise in 2020 because they offer more certainty than traditional IPOs —much needed in a year markets were upended by COVID-19. While the market conditions may change, SPACs will remain because they are a solid financial vehicle with strong investor protections, expedited access to public capital, and greater deal structure flexibility for buyer and seller.
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