How the SPAC Frenzy Is Conquering the Clean Energy World

Morgan Lewis
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Transactions involving a Special Purpose Acquisition Company (SPAC) accounted for more than 50% of new publicly listed US companies in 2020. Described as the new way to go public, SPAC transactions have proven to be an effective way to raise capital. SPACs are used in a variety of sectors and the clean energy space is no exception, as the number of renewable energy SPACs keep growing. This article will briefly explain why “green SPACs” became so popular and why, despite the challenges in the SPAC market, the green SPAC frenzy is likely to continue.

WHAT IS A SPAC?

A SPAC, also known as a “blank check company,” is a company with no business operations that is formed to raise capital in an initial public offering (IPO) for the purpose of acquiring or merging with an unspecified operating business after the IPO. This step is generally referred to as the “de-SPAC” or the “business combination.” As a result of the de-SPAC transaction, the target company becomes a publicly traded company.

THE SPAC BOOM

SPACs have been around for decades but have grown in popularity in the United States in the recent past and, despite regulatory challenges, are now attracting interest in the Middle East, Asia, and Europe. After a boom in 2020, the gross proceeds generated by SPACs in the first quarter of 2021 surpassed the total proceeds raised in 2020.

There are a number of explanations that can be given for the boom in SPACs, including the fact that SPACs oftentimes provide greater speed of execution than a traditional IPO; have proven to offer favorable valuations to target shareholders; allow access to additional funding where the de-SPAC includes a private investment in public equity (PIPE); have allowed companies with little to no operating history to go public; do not require the same time commitment from the target’s management that an IPO roadshow would; and enable the transaction to remain confidential until the deal is actually signed.

A GROWING INTEREST FOR CLEAN SPACS

Green energy–focused companies are in high demand as policymakers drive the transition to net zero to tackle climate change. This rapidly developing market requires huge amounts of investment to meet the challenge, and investors are equally eager to make their portfolio greener. With the SPAC market being well suited to raise funds in sectors that offer the potential for significant growth, SPACs are increasingly shopping for green companies. Beyond renewable energy, clean SPACs have targeted Environmental, Social, and Governance–focused businesses, as well as electric vehicles and battery storage companies.

Recent green SPACs’ announcements include the following:

  • Renewable energy technology provider Heliogen Inc. announced plans to merge with the all-female led SPAC Athena Technology Acquisition Corp. in July 2021; the venture will focus on electricity and green hydrogen production using solar power.
  • SPAC Peridot Acquisition Corp, closed its acquisition of Li-Cycle, a lithium-ion battery recycler, on August 10, 2021 and went public. The business focuses on battery resource technology for lithium-ion batteries.

CHALLENGES IN THE SPAC MARKET

Some of the pluses associated with going public through a SPAC are noted above. However, SPACs are not free from their own challenges. SPACs have attracted increased regulatory scrutiny over the past few months and, for example, are sometimes criticized for inherent conflicts of interest and a lack of appropriate transparency. By way of example, a recent green SPAC transaction between Canadian battery metals company DeepGreen Metals Inc. and SPAC Sustainable Opportunities Acquisition Corp., which was announced on March 4, 2021, is the subject of greenwashing allegations—environmental groups, including Greenpeace, have requested the Securities and Exchange Commission (SEC) to investigate the transaction.

The SEC’s public statements regarding a desire to increase the regulation of SPACs, general saturation in the marketplace, challenges in the PIPE market, and an increase in litigation regarding de-SPAC transactions have all slowed the pace of the SPAC frenzy, but are certainly not enough to eliminate it altogether.

GREEN-SPAC POPULARITY IS LIKELY TO CONTINUE (AT LEAST IN THE NEAR TERM)

It is no secret that the SPAC market isn’t flying as high as it once was. However, given the widespread support from regulators for green policies—which one can only imagine will boost investor and founder interest in the sector—for all of the reasons mentioned above, we expect target companies to continue to consider combining with a SPAC as an attractive way to access additional capital and go public for the foreseeable future.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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