Over the past year, raising capital through SPACs (special purpose acquisition companies) has become a hot trend on Wall Street. A SPAC is a company with no business operations formed solely to raise capital through an IPO for the purpose of acquiring an existing business. While only one SPAC launched an IPO in 2009, a decade later, in 2019, 59 SPACs launched IPOs. They raised about USD 13 billion. In 2020, 248 SPACs recruited more than USD 82 billion through IPOs.

What Is a SPAC?

A SPAC is like a type of public shell corporation that raises funds through an IPO while promising to acquire an active company within a predefined time frame. This structure provides the target company (the acquired company) with relatively certain capital compared to a regular IPO process.

SPACs have no history of operations, income, or profit. When conducting an IPO, SPACs only have a management team that strives to acquire companies and operations within the allocated short time frame. Behind every SPAC is an experienced and highly reputed entrepreneur (sponsor) who can raise capital with relative ease, largely in the particular industry or business sector disclosed in the SPAC’s prospectus.

The Israel Securities Authority recently published the conditions and principles for SPACs to launch IPOs.

According to the ISA’s IPO model, issuance of a permit to publish a SPAC’s prospectus will occur upon fulfillment of the following conditions:

• A minimum recruitment volume of ILS 400 million (whether through the issuance of shares only or shares and option warrants for shares), and the sponsor must invest at least ILS 40 million (to ensure the sponsor has skin in the game).
• Institutional investors must comprise at least 70% of the total investment.
• A SPAC has up to two years to select and close a deal with a target company. During this time frame, the capital raised must be invested in solid channels and held by an external trustee.
• The sponsor will not receive any remuneration until the company’s acquisition, and the maximum remuneration granted to the sponsor will be a success fee up to a maximum of 10% of the company’s equity.
• During the initial investment, the sponsor’s shares must be completely locked up until the company’s acquisition. In addition, a portion of the investment must be restricted for up to six months after the SPAC acquires a company.
• If the sponsor is to receive shares when a target company is acquired, these shares must be subject to a three-year lock-up period after the company is acquired.
• With regard to corporate governance, the SPAC’s board of directors must largely comprise independent directors. The acquisition of a target company is subject to the general meeting’s approval, after neutralizing the sponsor’s votes. If shareholders vote against acquiring the company during the general meeting, their money must be refunded.
• At the time of voting on a company acquisition, the SPAC’s disclosure and reporting to the investors about the target company must be in compliance with the Securities (Details, Structure and Form of Prospectus) Regulations, 5729-1969.
• If no company is acquired or if the sponsor exits within the defined time frame, the investors’ money must be returned to them.

The ISA’s conditions and principles are more stringent than those prescribed by the Securities and Exchange Commission in the United States. For example, the ISA’s equity requirement from the sponsor (10% of the minimum recruitment of ILS 400 million) is higher than the SEC’s requirement, which is between 2% and 4% of the recruitment volume. In addition, the ISA’s requirement of a scaled lock-up period of the sponsor’s shares for up to three years does not exist in the United States. Finally, the SEC does not require participation by institutional investors.

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