STATE-OF-THE-ART SPECULATIVE ANIMAL: ONE OF THE HOTTEST TRENDS ROAMING AROUND THE WALL STREET!

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OVERVIEW

Many individuals, specifically investors are generally delighted to keep pace with the progress of company’s launch on stock exchange market before the shares are jumping on fever-pitch demand.

However, the professional and institutional players with track record, such as hedge funds, pension funds, angel investors get the ball rolling, therefore leaving out the retail investors from the “racing track” with post-event breadcrumbs. Thus, the newest vehicle of SPAC may allow all investors (whether it is professional or retail) to take part in initial public offering process (IPO) from scratch.

The recent survey made by SPAC Research has shown that the number of SPACs has increasingly swelled in 2020. As of early October 2020, SPACs have launched 128 IPOs, raising a total of $49.1 billion, which, overall, is up from 2019 when just 59 SPACs raised a total of $13.6 billion[1]. These spectacular numbers come to prove that the upcoming years will probably be turbocharged with the tremendous inflow of SPACs.

 

HOW SPAC WORKS AND WHAT IS THE MYSTERY OF THEIR POPULARITY?

Being a publicly traded entity, the SPAC allows the sponsors/investors to raise money and acquire an existing private company (allowing the acquisition target to have publicly listed stock) more quickly and flexibly, with fewer associated costs and extensive financial disclosure requirements other than the outright IPO. While owning or obtaining share participation in SPAC, the sponsors or investors benefit from stratospheric stock growth, from one side, and bring a private promising company into public investment market, from the other side.

Firstly, being considered as blank-check corporations, in the 1980s, SPACs were not properly and fully regulated, and consequently, were purely deemed as shell companies, engaged in overvalued insider deals or charged with penny-stock fraud, costing investors more than $2 billion a year. In the decades that followed, US Congress stepped in to provide much-needed regulation, requiring, that the proceeds of SPACs be held in escrow accounts or trusts and forbidding their use until the M&As were complete or the company is publicly announced.

In the meantime, the SEC has tightened the SPAC regulations and policies transforming them into a cottage industry in which profound entrepreneurs, hedge-fund managers, and celebrities like Richard Branson, Bill Ackerman and Michael Jordan, mutual fund companies like Fidelity and T. Rowe Price became involved in SPACs[2]. This was due to a convergence of factors pertaining to the SPACs: an excess of available cash, a proliferation of start-ups seeking liquidity or growth capital (focusing investments on the fields of biotech, electric-vehicle companies, technology, digital media, material science, agritech, energy, financial sector, consumer field etc.), and regulatory changes (such as registration with SEC irrespective of the volume and value of assets under management) that had standardized SPAC products.

From then on, the outbreak of COVID-19 pandemic has also greatly influenced the outflow of SPACs since those vehicles are making out perfectly during stock market decline because of the way they operate.  

 

PROS OF SPAC

  • Greater Speed to Capital. The entire SPAC process may take up approximately three to six months on average, whereas the IPOs usually takes from nine to eighteen months.
  • Higher Valuations. Prior to closing of any deal or transaction, whereas the IPO greatly depends on market fluctuations and market conditions.
  • Attraction of Additional Capital. SPAC sponsors or experienced partner may raise debt or PIPE financing (private investment in public equity) in order to hold harmless the company from financial distress (in case of redemption of shares by the investors).
  • SPACs are trading at $10 per share and stay at a lower price for a while.
  • Hotspot Investment. SPACs are typically investing in seed, startup, and early-stage companies. Startups like OpendoorClover Health, and electric automaker Nikola are among the firms that have gone public via SPACs[3].
  • Open-door Investments. High number of shares allows both institutional and individual investors to “take their seat” in fundraising process.
  • Low-Cost Marketing. Normally, the SPACs do not need to organize extensive roadshows or investor pitching events.
  • Mixed Track Records. SPACs sponsors are generally profound, well-experienced financial and industrial individuals or entities whose hands-on experience may be beneficial not only for capital growth of SPAC, but also for its management and operational expertise.

 

CONS OF SPAC

  • Blind Investment. SPAC investors and sponsors are not aware of target company and how their invested capital should be used. At this point, it is nearly impossible to evaluate particular investment.
  • SPAC structure allows the sponsors (generally excluding the investors) to own more than 20% stake of SPAC along with existence of warrants/options allowing them to acquire more shares.
  • Right to Redeem Shares and Capital Shortfall. One of the guarantees of the investor is the possibility to redeem the shares held in SPAC, which may, in turn, drastically result in cash decrease or unavailability.
  • Narrow-Scope Due Diligence. The main types of due diligence (financial, legal etc.) are very limited as opposed to ones carried out within IPO process, which can bring about overvaluation (or inaccurate valuation) of business or unpredictable lawsuits and litigations.
  • No Underwriting. Under conventional IPO, the underwriters make sure that all regulatory and statutory requirements are satisfied prior to any launch, while in SPAC mechanism the target companies do not necessarily have underwriters.

 

HOW TO INVEST IN SPAC?

For the investor to freely break into the universe of SPACs, the latter shall bear in mind the following chain of actions;

  • Back and forth communication with stockbroker or wealth manager or simply, the investor individually can keep an eye out for IPOs and seek great investment opportunities.
  • Daily review of websites (including NASDAQ website) and lists upcoming IPO-oriented investment banks, including SPACs.
  • Updates coming from some industry associations, like SPAC Research, which sometimes issues S-1 filings by providing formal notice of a SPAC's intention to go public.

 

TAKEAWAY FOR ARMENIAN REALITY

Despite the concept of SPACs is mainly unknown to the legal and financial community of Armenia, the local investors are entitled to own shares of U.S. SPACs. Moreover, due to the interest in many Armenian startups, a similar vehicle may be established for local and international investors to boost the financials of Armenian startups.

 

HOW WE CAN HELP?

Our team is experienced in providing sophisticated legal advice in relation to a wide range of complex issues associated with the capital markets. With the help of our collaborating partner network in the U.S., we will be delighted to provide legal assistance in relation with incorporation, structuring and design of SPACs.

 

[1] https://www.businessinsider.com/what-is-a-spac

[2] https://www.gobankingrates.com/investing/strategy/spac-special-purpose-acquisition-company/   

[3] https://www.businessinsider.com/what-is-a-spac