The last three quarters have seen a rebirth of initial public offerings by special purpose acquisition corporations (“SPAC”) brandishing new features and creative solutions to the problems that contributed to the demise of the SPAC market in 2008. National securities exchanges have responded with new rules to facilitate new listings for SPACs.
A SPAC is a blank-check company that raises capital in an initial public offering (“IPO”) to use for a future undetermined business combination with one or more operating businesses or assets. To entice investors to buy, the SPACs offer units composed of shares of common stock as well as discounted warrants that can be sold shortly after the IPO, providing an opportunity for immediate return. For the protection of investors, SPACs are structured so that the proceeds of the IPO are held in trust until the SPAC uses the funds to consummate an acquisition. Historically, SPACs have had to obtain a super-majority vote of stockholders prior to consummating any acquisition and offer stockholders that vote against the acquisition the ability to redeem their shares of common stock in exchange for their pro rata share of the trust funds. If a qualified acquisition is not completed within a defined interval of the IPO (historically 18-24 months), the SPAC liquidates and distributes the funds held in the trust account to its common stockholders. The most prevalent investors in SPAC IPOs have generally been hedge funds, attracted to the locked-in rate of return achievable on a sale of the warrants and additional arbitrage opportunities for any warrants retained, low volatility of a mostly-cash balance sheet, minimal downside risk given the cash is held in trust and the potential large upside in the context of an acquisition.
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