It’s the hottest gig in the IPO market now – the Special Purpose Acquisition Company, or SPAC. Since January 1, 2021, over 70 new SPACs have filed registration statements with the SEC to offer their shares publicly. Those having already gone public in 2021 to date have raised nearly $88 billion in equity capital from investors.
So, what’s a SPAC and why are there so many of them now?
A SPAC is simply a newly formed corporation that publicly sells stock to raise investment capital for the purpose of seeking to acquire one or more privately held businesses. Money raised is held in trust until the company identifies and negotiates an acquisition. But, it’s a race. SPACs generally have only two years to find and consummate a deal, or they have to give the funds back to the public shareholders.
SPACs are not new. After the stock market crash in 1987, the IPO market collapsed, but soon came back to life with numerous “blind pool” public stock offerings – essentially, SPACs without the regulatory oversight applicable to today’s IPO offerings. Increasingly, SPACs are sponsored by recognizable private equity and venture sponsors, well-known executives and celebrity figures. Rumors are that even former President Trump is considering sponsorship of his own SPAC. Perhaps in times of global turmoil, such as we’ve been living through with the COVID-19 pandemic, it’s easier for investors to entrust third parties to find a good operating company than for investors to pick one on their own.
Start-up entrepreneurs may wonder why they should even care about this SPAC attack.
Since SPACs want to acquire private enterprises with significant growth potential, fast growing angel and venture-backed technology startups are prime targets for SPACs on the hunt. Entrepreneurs and their investors seek early and great exit opportunities, and their start-ups are almost always looking for new growth capital. Merging a tech start-up into a SPAC is viewed as a shortcut way to become a publicly traded company, creating liquidity for early investors and providing the often necessary cash for the company’s operational plans.
So, if you are approached by a SPAC interested in possibly acquiring your company, you shouldn’t look a gift SPAC in the mouth. They are real and deserve your consideration as a financing and liquidity option.
We at Avisen Legal are available to assist you in understanding your risks and opportunities in selling your business to a SPAC.
Jeff Robbins, Avisen Legal partner and head of the firm’s entrepreneurial practice, is the founder of AngelPolleNation, a networking organization designed to create increased awareness, communication and education among accredited investors, informal investment clubs and more formal angel investment groups in Minnesota. In addition to a regular education topic of interest to early-stage investors, AngelPolleNation features three promising start-up companies at each meeting for investment consideration.