Why SPACs Are Exploding, A CEO’s Take

SPACs (Special Purpose Acquisition Companies) have seen a surge in interest in recent months with a number of high-profile deals from Draft Kings to Virgin Galactic

SPCE
and many more coming. The opportunities for the investor are relatively clear. SPACs give a chance to grab a stake in a hot and relatively new company. Importantly, that carries risk too, as recent investors in electric car company Nikola can attest given recent fraud allegations. Also, the SEC are exploring greater disclosures on SPAC compensation across the board. Still, for the companies involved, why are CEOs picking the SPAC route relative to an IPO or direct listing?

Speed

Speed is one consideration, especially in 2020. George Arison, c0-CEO and co-founder of Shift, a tech-enabled service for buying and selling cars, decided to use a SPAC earlier this year to bring his company to market, and that process is ongoing. Mr Arison said “A traditional IPO typically takes longer than a SPAC and those additional months can introduce more deal uncertainty than if you go through the much speedier SPAC process.” He mentioned that this is particularly true in today’s environment with the economic uncertainty and the pending U.S. election. The process of SEC review ahead of an IPO can add months to a deal’s timeline. As we’ve seen repeatedly in 2020, much can change in a few months.

Forward-Looking Disclosures

A SPAC process is a merger. This enables a different level of disclosure, in this case Shift are able to market the deal using forward-looking projections. In the case of an IPO, typically only historical financials can be shared under Securities Act Rule 169. Being able to share forecasts can be helpful for fast-growing and potentially loss-making companies. Though, of course, it creates a risk that expectations may not be met.

Size Matters

The other question is with the growing number of blank-check companies out there, how are CEOs selecting which SPAC to merge with? Here Mr Arison noted the rapid evolution of SPACs even over the summer. “The landscape for SPACs has changed significantly since we announced our SPAC back in June.” That said, size is a key consideration, Arison noted, “SPACs in the $500M to $1.5B market cap are harder to come by.”

That greater size can be useful for a company looking to raise material funds through the SPAC process. Arison stated. “Money was also a factor because SPACs inherently enable companies to raise more cash than a traditional IPO.” As a result that becomes a consideration for SPAC investors too.

Deal Size

Recently, though there has been an explosion in the number of SPACs and many of them are relatively small. The average size of a SPAC seeking a target is approximately $350 million based on SPAC Research data. This suggests that the few much larger SPACs may have greater ability to close deals, in what is becoming an increasingly congested space. A SPAC that ultimately fails to close a deal is likely dead money, or worse, for investors and any warrants would generally expire worthless.

What’s Next?

The SEC have said recently that they are looking at SPAC disclosures, particularly with regard to compensation. This may be, in part, because SPAC management can do very well from SPAC deals, even if investors don’t see gains.

Still, it does appear that SPACs are a useful tool for certain companies to come to market. Though SPACs have been around for years, the SPAC explosion is highlighting the complexities and nuances inherent in the IPO process from review timelines to rules on forward-looking disclosures. Though the vast growth in SPACs may also signal a relatively frothy U.S. stock market.

It’s also of note that many of the crop of recent SPACs are relatively small, and that may not be a great fit for many CEOs looking for material funding. Or at least, the larger SPACs may have relatively unique access to a different set of companies than smaller ones. It’s unlikely all SPACs will find merger partners.