The year of SPACs
In 2020 the SPAC boom seemed to be on everyone’s lips,[1] marking a record number of IPOs.[2] Sponsors came from a plethora of backgrounds and included activist investor Bill Ackman,[3] former speaker of the House Paul Ryan,[4] former director of the National Economic Council Gary Cohn,[5] and former basketball player Shaquille O’Neal.[6]
While Blank Check Companies can be traced back to 18th century England and the South Sea Bubble,[7] the SPAC investment vehicle emerged in modern financial markets in August 2003 by asserting itself as a new asset class.[8] In the U.S., 248 SPACs went public in 2020[9] (four times more than the year before[10]), raising $83bn (more than in the last 10 years combined).[11] Most notably, since August 2020, SPAC IPOs have outnumbered ‘traditional’ IPOs.[12]
Using the end of the previous year and the beginning of the new one as the opportunity to draw a comprehensive full picture, this article aims at quantifying the relevance of the phenomenon in the U.S., with a comparative analysis of the rules applicable to the London Stock Exchange (“LSE”), to underline the importance of a regulatory framework friendly to SPAC shareholders.
What is a SPAC?
A Special Purpose Acquisition Company (“SPAC”) is a shell company – with no financial history or assets – constituted for the sole purpose of raising capital through an IPO and then acquiring or merging with a non-listed company.[13] SPACs generally offer $10 shares,[14] and they have been called “poor man’s private equity fund”[15] exactly because they grant the possibility to invest small sums in a fund that will later acquire a private company.[16]
SPACs’ promoters, as sponsors of the operation, are generally rewarded with 20% of the post-acquisition company,[17] very different than private equity executives, who are usually paid the standard share of 20% of the profits of the fund.[18] SPACs’ shareholders are also in a unique position: if the company does not conclude any business combination in a period usually set at two years, the shell company will be liquidated, and they will get their money back.[19] If, in the opposite scenario, the target company is identified, shareholders can either stay invested and agree to the deal, approving the transaction at the shareholder meeting, or vote against the deal and get a refund of their investment.[20] Thirdly, they can sell their shares and exercise the ‘exit’ option. [21]
A quantitative overview
With NASDAQ welcoming 300 IPOs that raised $77.86bn[22] and the NYSE hosting 163 transactions raising $81.8bn,[23] in 2020 U.S. stock exchanges continued to assert themselves in a global IPO scene that on December 3, had raised more than $330bn through about 1600 listings.[24]
The U.S. IPO calendar, however, was dominated by SPAC offerings,[25] with the NYSE as their main home,[26] hosting the 6 biggest SPAC proceeds of the year.[27] The largest IPO in the U.S. was – in fact – a SPAC: Bill Ackman’s Pershing Square Tontine Holdings Ltd. raised $4bn, pricing shares at $20 instead of the common $10.[28]
According to SPAC Insider, not only there have been more SPAC IPOs in 2020 than in between 2008 and 2019 combined, but the average size of the IPOs is now at an all-time high ($335m).[29] SPAC IPOs went from accounting to 2.5% of total IPO funding in 2011, to 45% in 2020,[30] rapidly becoming the “hottest investment vehicle” available to investors.[31]
U.K. SPACs’ regulatory framework
The SPACs’ momentum is still a predominantly American phenomenon;[32] on the other side of the Atlantic the SPAC phenomenon, although on the rise[33], is yet to take off.[34]
U.K.’s financial center lacks a specific regulatory framework for SPACs.[35] As mentioned before, a sensible attractiveness of U.S. SPACs’ is due to the flexibility accorded to shareholders, who can approve the proposed acquisition and stay invested, or de-invest and get their money back in case of dissent, or sell their shares. However, SPACs listed on the Main Market standard listing of the LSE[36]are not required to seek a shareholder approval on a proposed acquisition.[37] Subsequentially, shareholders do not have the possibility to get their money back if they are in disagreement with the promoter’s choice of the combination. At the same time, U.K. SPACs’ shareholders do not retain the possibility to sells their shares and exercise an “exit.” In fact, an acquisition by a SPAC qualifies as a reverse takeover, where U.K. law mandates a trading suspension until the SPAC issues a prospectus.[38]
Different rules apply for the LSE’s Alternative Investment Market, which was initially designed for smaller companies. After a 2015 scandal, SPACs are required to deploy their capital in 18 months and, more importantly, to obtain shareholder approval for acquisitions.[39] While SPAC promoters have to bear the costs of the prospectus, promoters often prefer the Main Market for its prestige and relaxed procedural regulations.[40]
In this dichotomy, promoters opt for the Main Market because of the security of the business combinations which will not be stopped by shareholders due to lack of regulations. SPACs, on the other hand, are less frequently used because potential shareholders are not willing to invest in SPACs if they cannot vote against the transactions or sell their shares.[41]
This is a clear example of a case in which the absence of guarantees for shareholders holds back investments: shareholders are not willing to invest in “Blank Check Companies” when they become almost a ‘blind check’, investments without the possibility of an opt-out.
Conclusion
The “doors” of the U.S. stock market is becoming crowded with shell companies. If the market were an aquarium, listed SPACs would certainly not be floating jellyfish, but sharks looking for a potential target. In this context, non-listed companies, so to say the small fish, are in the viewfinder of the next wave of M&A: SPACs that went public in 2020 possess the astonishing amount of $83bn in cash and have a life span to spend it.
The analysis of the U.K.’s rules showed that a regulatory procedural framework friendly to SPAC shareholders could help to boost IPOs: today SPACs on the LSE are falling short because on the Main Market no transaction’s approval is required, and investors cannot redeem their shares, nor trade them.
The 2020 has been the golden year of U.S. SPACs. Next year will tell us if this investment vehicle will become even more popular in the States and if its momentum will rise on the other side of the Atlantic.
Postscript
On February 3, 2021, SPAC Insider already counted the outstanding number of 100 SPAC IPOs, that raised $29bn[42]. At this pace, in 2021 U.S. SPACs could even quadruple the 2020 record.
[1] Betsy Atkins, The Rise of SPACs, Forbes (Aug. 27, 2020), https://www.forbes.com/sites/betsyatkins/2020/08/27/the-rise-of-spacs/?sh=3515088f337a; Mike Bellin, Why companies are joining the SPAC boom, PWC: Deals Blog (Sept. 22, 2020), https://www.pwc.com/us/en/services/deals/blog/spac-boom.html; Crystal Tse, The New ‘Blank Check’ Barons Are Coming for Wall Street, Bloomberg (Sept. 11, 2020), https://www.bloomberg.com/news/articles/2020-09-11/from-bill-ackman-to-billy-beane-these-are-the-new-spac-barons; Andrew Ross Sorkin, Lauren Hirsch, Michael J. de la Merced & Jason Karaian, What’s Behind the SPAC Boom? The Urge to Reverse Merge, N.Y. Times: DealBook (Sept. 16, 2020), https://www.nytimes.com/2020/08/25/business/dealbook/spac-ipo-boom.html.
[2] Nessa Anwar, SPAC listings hit a record high in 2020 — but what are these ‘shell companies’?, CNBC (Dec. 10, 2020), https://www.cnbc.com/2020/11/23/what-are-spacs-2020-saw-record-number-of-shell-companies-listed.html.
[3] Ortenca Aliaj, Sujeet Indap & Miles Kruppa, The Spac sponsor bonanza, Fin. Times (Nov. 13, 2020), https://www.ft.com/content/9b481c63-f9b4-4226-a639-238f9fae4dfc.
[4] Ben Winck, Former House Speaker Paul Ryan joins ‘blank-check company’ craze with $300 million IPO, report says, Bus. Insider (Aug. 20, 2020), https://markets.businessinsider.com/news/stocks/paul-ryan-spac-chairman-blank-check-300-million-ipo-acquisition-2020-8-1029521755.
[5] Sergei Klebnikov, Former Trump Adviser Gary Cohn Joins SPAC, Seeking $600 Million For IPO, Forbes (Aug. 26, 2020), https://www.forbes.com/sites/sergeiklebnikov/2020/08/26/former-trump-adviser-gary-cohn-joins-spac-seeking-600-million-for-ipo.
[6] Kori Hale, Shaq Moves Into SPACs With Former Disney Execs & MLK Jr.’s Son, Forbes (Oct. 20, 2020), https://www.forbes.com/sites/korihale/2020/10/20/shaq-moves-into-spacs-with-former-disney-execs–mlk-jrs-son/?sh=1d6c12ae6c77.
[7] Yochanan Shachmurove & Milos Vulanovic, Specified Purpose Acquisition Company IPOs, in The Oxford Handbook of IPOs 301, 313 (Douglas Cummings & Sofia A. Johan eds., 2018).
[8] Id. at 301.
[9] SPAC Statistics, SPACInsider, https://spacinsider.com/stats (last visited Jan. 25, 2021).
[10] Carmen Ang, Return of the SPAC: They’re Back and Bigger than Ever, Bus. Insider (Dec. 31, 2020), https://markets.businessinsider.com/news/stocks/spacs-are-back-and-bigger-than-ever-1029927519.
[11] Id.
[12] Brooke Masters, Year in a word: Spac, Fin. Times (Dec. 31, 2020), https://www.ft.com/content/80458983-1693-4022-ba23-113925d24d70.
[13] See Shachmurove & Vulanovic, supra note 7, at 301.
[14] Michael D. Klausner & Michael Ohlrogge, A Sober Look at SPACs 3 (NYU L. & Econ.Research Paper No. 20-48, 2020), https://ssrn.com/abstract=3720919.
[15] Lora Dimitrova, Perverse Incentives of Special Purpose Acquisition Companies, the ‘Poor Man’s Private Equity Funds’, 63 J. of Acct. & Econ. 1, 1 (forthcoming 2017), https://ssrn.com/abstract=2139392.
[16] Usha Rodrigues & Mike Stegemoller, Exit, voice, and reputation: the evolution of SPACs, 37 Del. J. of Corp. L. 1, 3 (2013).
[17] Id. at 23.
[18] Tim Jenkinson & Miguel Sousa, Why SPAC Investors Should Listen to the Market, 21 J. Appl. Corp. Finance 38, 39.
[19] See James S. Murray, The Regulation and Pricing of Special Purpose Acquisition Corporation IPOs 4 (Jan. 30, 2014), https://ssrn.com/abstract=1746530.
[20] See Jenkinson & Sousa, supra note 18 at 39.
[21] Id.
[22] Nasdaq Welcomes 300 Companies in 2020, Expects ‘Robust’ IPO Pipeline in 2021, MarketInsite Nasdaq Blog, (Dec. 21, 2020, 9:30AM), https://www.nasdaq.com/articles/nasdaq-welcomes-300-companies-in-2020-expects-robust-ipo-pipeline-in-2021-2020-12-21. See NASDAQ website for more information.
[23] In the Busiest Year on Record for Initial Public Offerings, The New York Stock Exchange Ranks Number One for IPO Proceeds, NYSE, https://www.nyse.com/2020-number-one-for-ipo-proceeds (last visited Jan. 30, 2020) [hereinafter NYSE Busiest Record].
[24] Helen Bradley, IPO Report 2020 & Key Trends Set to Shape 2021, Baker McKenzie, https://bakermckenzie.turtl.co/story/ipo-report-2020/ (last visited Jan. 30, 2020).
[25] See IPO calendar, Nasdaq, https://www.nasdaq.com/market-activity/ipos (showing the predominance of the ‘acquisition corp.’).
[26] See NYSE Busiest Record, supra note 23.
[27] Id.
[28] C Nivedita & Joshua Franklin, Ackman-backed blank check company’s units rise in NYSE debut, Reuters (Jul. 22, 2020, 5:30AM), https://uk.reuters.com/article/us-pershingsquare-investment/ackman-backed-blank-check-companys-units-rise-in-nyse-debut-idUKKCN24N1OE.
[29] SPAC Insider, SPACDEX: Return Compared to S&P 500, https://spacinsider.com/stats/ (last visited Jan. 30, 2020).
[30] Michael D. Klausner & Michael Ohlrogge, A Sober Look at SPACs, N.Y.U. L. & Econ. Research Paper No. 20-48, https://ssrn.com/abstract=3720919, at 2, Figure 1.
[31] Crystal Tse, Special Purpose Acquisition Companies, the Hottest Investment Vehicle, Bloomberg (Dec. 3, 2020) https://www.bloomberg.com/news/articles/2020-12-03/spacs-the-year-s-hottest-investment-vehicle-bloomberg-50-2020.
[32] Michael J. de la Merced, The Year in Deals Can Be Summed Up in 4 Letters, N. Y. Times (Dec. 19, 2020), https://www.nytimes.com/2020/12/19/business/dealbook/deals-mergers-acquisitions-2020.html.
[33] Clara Denina, Abhinav Ramnarayan, Arno Schuetze, Europe set to tiptoe into SPAC-land as shell company deal pipeline builds, Reuters (Dec. 4, 2020), https://uk.reuters.com/article/us-spacs-europe/europe-set-to-tiptoe-into-spac-land-as-shell-company-deal-pipeline-builds-idUKKBN28E0R6.
[34] Baker McKenzie, US SPAC market makes first moves into Europe, Int’l Fin L. Rev. (Dec. 15, 2020), https://www.iflr.com/article/b1pmn84j7fj726/us-spac-market-makes-first-moves-into-europe.
[35] Daniele D’Alvia, The international financial regulation of SPACs between legal standardised regulation and standardisation of market practices, 21 J. Fin. of Banking Reg, 115 (2020).
[36] It is worth noting that due to the absence of financial history, UK SPACs cannot be listed on the LSE’s premium listing.
[37] D’Alvia, supra note 35.
[38] Baker McKenzie, supra note 34.
[39] D’Alvia, supra note 35.
[40] Id.
[41] Hugh Osmond, Time for UK regulators to open door to Spacs, Fin. Times (Dec. 17, 2020), https://www.ft.com/content/b364f03e-b026-4ec5-82fb-3991400de851.
[42] See supra note 9.
