Fernway DiarySM

Jan 20, 2021

A Special Purpose Acquisition Company (SPAC) is a liquidity structure with no operating history, whose sole purpose is to raise money to acquire other companies. It’s an abstract concept but growing in popularity and lately we’ve seen high-profile examples in the news. For example, Virgin Galactic, DraftKings and Nikola Motor. SPACs are likely a topic that investors and companies looking to exit should start familiarizing themselves with if they haven’t already.

How is a SPAC formed?

A SPAC generally goes through the typical IPO process of filing a registration statement with the U.S. Securities and Exchange Commission (“SEC”), clearing SEC comments, and undertaking a road show followed by an underwriting process. They usually pair up with a reputable manager, professional executive, and looking to buy a company at some point generally within the next two years after they IPO. Once they identify a deal, they bring it to the people invested in the SPAC, and the shareholders can vote to approve the deal should they chose to invest in it, or use redemption rights to ask for their money back.

SPAC popularity

SPACs raised a record-breaking $82.1 billion in 2020— a sixfold increase from last year’s record high. SPACs dabble in a variety of industries and sectors, from cannabis and green technology, to sports-betting arenas to commercial space flight. In 2020, a handful of SPACs gained more than 100{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} in value from their offer date.

SPACs versus traditional IPOs

Under a traditional IPO process, it can take companies several months or possibly years to prepare for a public offering. This involves talking to banks, going on a roadshow, and negotiating the price of their future offering with investors. On the other hand, SPAC deals can be negotiated and off to market within weeks. From the perspective of the selling company, a SPAC is ideal because of the ease to market. Instead of having to negotiate with institutional investors as part of an IPO roadshow, the selling company can negotiate with the SPAC, generally managed by one reputable manager. From an investor’s perspective, the advantage of a SPAC is multi-fold; when investors buy at the net asset value, they can use their redemption rights to get their money back if they don’t like the company the SPAC chooses. Alternatively, if the SPAC chooses a great company, the investor is in from the start. The third advantage is that you can pick your SPAC based on who is managing it. If for example, there’s a particularly impressive manager or CEO on the board, that might be an indication to invest with that SPAC.

The terms offered by one SPAC to another can differ – the investor and person managing the SPAC can make all the difference. Just like everything else when it comes to investing, it is important to do your due diligence and research to understand what you’re buying into. If you’re curious to learn more about SPACs and other investment vehicles, contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.