SPACs are Special Purpose Acquisition Companies that are created for the sole purpose of raising capital through an IPO to acquire private companies’ equity through a merger. SPACs have no commercial operations: they do not produce or sell anything. SPACs’ only assets are typically the funds raised during its IPO, which is why they are often referred to as shell companies “blank-check” companies.
Usually, SPACs are formed or sponsored by a team of institutional investors, or private equity or hedge funds professionals. For example, high-profile CEOs like Richard Branson and fellow billionaire Tilman Fertitta have created their own SPACs.
Many founders of SPACs often hold an interest in a specific industry when setting up a SPAC. It is not a rare occurrence that SPACs founders create these entities even before the target companies are identified for acquisition. It is not difficult for institutional investors with a history of success to convince people to invest in something unknown. The business structure of a SPAC enables investors to allocate their funds for the acquisition of one or more businesses to be identified after the IPO.
Sometimes, the founders can even invest as little as $25,000 at the starting point, and later they will receive “founder shares” that may amount to as much as 20% interest in the SPAC.
Issuing the IPO
Just as with a regular IPO, SPAC IPO is also handled by an investment bank. The SPAC management team and the investment bank agree on a fee to be charged for the service that usually is about 10% of the IPO proceeds.
The prospectus of the SPAC mainly focuses on the sponsors’ and directors’ experience, and not company performance history and revenues since there is no performance history and revenues to report.
The securities sold during a SPAC IPO are offered as units and usually are sold in common shares at $10.00 per share. Often these units also include a warrant that allows investors to purchase a common share at some point in the future at a higher price of $11.50 per share.
All funds raised in an IPO are deposited in a trust account until the target company has been identified and the acquisition has been completed. SPACs normally have between 18 and 24 months to identify an entity for acquisition and negotiate a buyout. If for some reason the planned acquisition does not go through, the SPAC is liquidated, and the funds are returned to the investors.
SPACs have been around for several decades and often have been used as a last resort for small companies that would have otherwise had trouble raising money through a conventional IPO that requires more disclosure and is more strictly regulated. Since 2020 SPACs have surged due to the extreme market volatility partially caused by the global pandemic, and 2020 became a record year for SPAC IPO filings. As of July 2021, US-listed SPACs only had raised to $111.7 billion.
In Europe, Luxembourg is already a globally accepted structuring jurisdiction for IPOs, mergers, and acquisitions (M&A), and private equity transactions. Luxembourg provides flexible terms for foreign investors to set up SPAcs there, also allowing an option to be listed on foreign stock exchanges.
For those seeking to raise capital with a SPAC on the global markets, Wolfline Capital provides full legal support in setting up a SPAC in Luxembourg jurisdiction.