SPACs and ESG Companies

SPACs and ESG Companies

SPACs are showing up front and center in the minds of many investors and business owners as an expedient vehicle for forming a new public venture or selling an existing business.

A rapper named Cassius Cuvée even wrote a song (click for the video) about SPACs:  “If you in the SPAC game you know what I’m talking about,” raps Mr. Cuvée. “We sick of IPOs, day one locking us out.”

There is also this quaint line:  “See the future’s EV and also ESG So the best type of spac is ACTC.”  Mr. Cuvee seems to be endorsing SPACs that focus on ESG (Environmental, Sustainable and Governance) as well as Electric Vehicles.  “ACTC” is the NASDAQ symbol for Arclight Clean Transition Corp.”, a SPAC that focuses on ESG and Impact investing.

What is a SPAC?

A Special Purpose Acquisition Company (SPAC) is a publicly listed entity with the sole purpose of raising funds, finding a private target company that meets their criteria, acquiring that company with their funds and taking it public.  SPACs are often referred to as blank-check companies because they are simply raising money for a future venture which is generally undetermined at the onset.

What makes a SPAC different?

SPAC’s don’t rely only on big hedge funds and other large investors to do deals.  Like Mr. Cuvee, many smaller investors invest in SPACs because they see the potential for large and impactful gains and the ability to invest in companies that share their interests and goals.  Investing in a 401(k) or mutual fund doesn’t usually give normal investors that ability.  Most normal investors are not invited to invest in private equity or venture capital.  Plus SPAC’s are really growth oriented so investors that want to invest in a company at a fairly early stage are attracted to the upside potential.

Going public and getting funded is also faster than a traditional IPO and as fast if not faster than a private equity acquisition. The merger can take place within three or four months which is a considerably shorter time frame than a traditional IPO process. And while a private equity fund can move fast, most private equity deals don’t leave the target company shareholders with a significant stake in the company moving forward.  In a SPAC, they do and usually management stays on to continue running the company, but now with a whole lot more money to make it happen.

Why SPACs and ESG? 

While there are now many funds that focus on ESG investing, funds spread their money around a lot of companies to minimize risk.  Not many funds allow an investor to really focus on one sector, let along a single company.  Investing in the EV sector to use Mr. Cuvee’s example used to mean either buying shares of Tesla in the market or investing in a fund that holds Tesla shares.  With a SPAC, an investor can invest in a company whose sole purpose is to merge with a fast-growing EV company and help it grow.  This ability to potentially couple big gains while supporting sustainable and environmentally responsible companies is a huge draw.

The SPAC intention

At the onset, the SPAC managers might have a specific company in mind, as in the recent case of Richard Branson’s high-profile SPAC merger. More often, they have a broader view for the type of organization, industry or product, like EV or ESG. ACTC fits into this broader category, with a strong focus on clean energy, having announced a merger with Proterra.

Between the global pandemic and social unrest, a lot of people who used to be happy sitting on the sidelines have had their eyes opened about pressing needs within our economic, social and ecological systems.  SPAC managers can target companies that might solve one of today’s most urgent issues—quite possibly with a focus on environmental sustainability. Examples of socially responsible areas of focus are recycling, biotechnology, renewable resources, sustainable food sourcing, healthcare, electric vehicles, etc. “It amaze ya – how many EVs are in favor Much respect to Mr. Musk – Elon the Trailblazer”

Businesses selling to a SPAC

Why would a business owner consider selling to a SPAC? Target companies usually keep a significant percentage of the merged company.  Target company management usually stays in place.  A SPAC merger brings significant cash to achieve the business goals.  Target company shareholders will eventually have the ability to sell their stock in a public market.  The deal can be done faster than many other types of deals.  Competition among SPACs for deals can also lead to better terms.

SPAC trends

SPAC activity is obviously trending upward.  SPAC fundraising hit a record in 2019 at $13.6 billon. That number was surpassed in 2020 with an amazing total of $82.6 billion, and in less than three months, 2021 has already surpassed $83 billion and is expected to continue growing.

The SPAC opportunity is drawing attention of well-known financiers as well as executives and investors who are interested in the short-term advantage and, for the SPAC managers, the compelling challenge of locating the ideal target company. With the efforts of ESG-minded investors, much-needed advances in sustainability are likely to continue at an accelerated rate.

In the immortal words of Mr. Cuvee:

See me chasin paper,

I’m a money maker

See me chasin paper,

I’m a money maker

See me chasin paper,

I’m a money maker

Hey, hey, money maker money maker, money maker

If you have found this information interesting, please share it with a friend who would also benefit. And if you’d like to delve into the topic further, we’re here to answer questions and provide more details. At Avisen, we provide legal services to companies and investors who value Impact and want to make positive changes.  We would love to talk to you.  Give us a call at 612-584-3400. Thank you!

Todd Taylor

Todd Taylor

I work with impact companies and the investors that fund them. Developers, technology companies, private equity, venture capital and infrastructure funds hire me to help with developing and financing sustainable and impact projects, including renewable and conventional energy projects, clean tech, agriculture tech and food tech companies and infrastructure projects. I get hired because I get results. Read Todd's Bio.

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