How to get started with a SPAC
Findley Gillespie: If a CEO or CFO wants to access the public markets through an IPO or SPAC, where should they start? Hire counsel and auditors and talk to investment bankers? What else?
Amanda Rose: Yes, it’s a good idea to hire counsel and auditors and talk to investment bankers.
If you’re interested in a SPAC, hiring an auditor to start working on audited financial statements is really important because it can take several months, if not longer. Auditors, and anyone working with SPACs, are busy — so getting the process started sooner rather than later is key.
Working with legal counsel early in the process is also vital. They can draft some of the disclosures and, maybe more importantly, be there as a resource to help you better understand the structure, options, and pros and cons between an IPO, SPAC transaction, or direct listing.
Your banker can help survey the SPAC landscape, run important models, and help you understand potential valuation. That’s an important step to understand what the economics might look like.
Often, banks can be biased toward one structure or another, so it’s helpful to have a legal resource present that has experience with each structure to help advise from an unbiased perspective.
Findley: With SPACs being the new option for going public, are you spending a lot of your practice helping clients to understand if a traditional s-1 IPO or SPAC is better for their company?
Amanda: It really varies. I’ve worked with companies that initially start with a SPAC transaction and then move to an S-1 IPO later in the process. They sign the term sheets with a SPAC, and then we find a disconnect between the valuation on the term sheet and the valuation the private investment in public equity (PIPE) investors are willing to invest at.
That incongruency can potentially blow up a deal because it alters the economics so that a SPAC transaction doesn’t make sense for the target company. The target company could be holding less than 50% after the de-SPAC transaction, so that can change its view and transaction approach.
I also work with companies that are considering both a SPAC transaction and S-1 IPO. If they’re working with a higher quality bank that thinks they have a profitable path through a traditional IPO, that approach tends to be less expensive, less dilutive, and, in certain cases, actually quicker than a SPAC transaction.
A SPAC transaction often includes identifying the SPAC, negotiating the SPAC, and navigating the uncertainty around redemptions. We work with a lot of life science companies for which the trust-account cash that comes with the SPAC is an important element of the transaction.
If we’re not sure what cash redemptions look like, that can change the economics of the transaction. Having a banker evaluate these elements can help you model your approach and think about assumptions critically.
These complications have led some companies to lean toward traditional IPOs. Obviously, that isn’t always the case; there are times when a SPAC transaction makes sense. We’ve worked on some really successful SPAC transactions where there was a low redemption rate, and we negotiated for earnout and redemption of warrants from sponsors that impacted dilution in a positive way.
Overall, it’s important to really dig into the economics and potential levers of each transaction approach for your company’s specific facts and circumstances.
Findley: When a SPAC goes public, does it identify a target or a sector?
Amanda: SPACs can target an industry, and most SPACs have some sort of industry focus. However, by law, they can’t specifically have a target company in mind when going public — that’s a Securities and Exchange Commission (SEC) rule.
Once the SPAC entity goes public and the IPO closes, it can start negotiating with target companies. So, the SPAC management and board will identify a set of target companies and reach out to them to conduct due diligence and eventually sign a letter of intent or term sheet, which usually contains an exclusivity provision to lock in the relationship for a certain period of time.
Given how hot the IPO market is right now, especially in life sciences, companies are going public in earlier stages of development than I’ve ever seen. So just because you’re at an earlier stage, I wouldn’t say the IPO market is necessarily closed to you right now.
But, in a SPAC transaction, it’s important to know that the interested PIPE investors are often the same investors you’d be going out to in a traditional IPO — so whatever valuation they’re putting on their PIPE would likely be similar to the valuation in an IPO. If you’re thinking it might not be the right time to pursue a traditional IPO, keep in mind that raising the PIPE in a SPAC transaction might be challenging now and in the near future as well.
We’re also seeing SPAC sponsors or other insiders that backstop or anchor the PIPE, and the PIPE then backstops the redemptions. If you choose to go this route, it opens up another way to raise capital in the PIPE that makes the SPAC available to you, but it also changes what the merged company looks like as a public company. It will be very thinly traded with very few institutional investors, potentially making it difficult to raise capital as a public company.
Findley: Jeremy, what are some takeaways from your clients that were initially pursuing a SPAC transaction and changed to a traditional IPO?
Jeremy Kuhlmann: A lot has been written about how quickly a company can go public via SPAC transaction, with some deals closing quite quickly. And that can be true if a company is prepared.
From a timing perspective, traditional IPOs can also come together quite quickly, especially if a company is willing to dedicate the right amount of resources to the project.
The all-virtual environment has made the process more efficient in some ways. There’s no longer an expectation that the company and its legal, diligence, banking, and audit teams have to be physically in the same room for organization meetings, drafting sessions, and road shows. This can greatly reduce the duration of the transaction. We’ve also seen changes to the timing and amount of SEC comments, which helps keep the process moving as well.
Finally, the returns on newly public companies via some of the IPO exchange traded funds (ETFs) were strong in 2020. As an example, the Renaissance IPO EFT, which invests in newly public companies such as Peloton, Uber, and Zoom, saw annual returns of 107% in 2020.
While we don’t have much history for companies that have gone public via SPAC transaction, it seems returns from companies that have gone public via a SPAC aren’t as high as those that go through a traditional IPO.
Findley: If a client wants to move forward with a SPAC transaction, how do they actually find a SPAC?
Jeremy: Unlike the past, when only certain banks were participating in these transactions, all the major banks are now focused on SPAC transactions. If a company is a good target in one of the emerging areas, like electric vehicles, it wouldn’t be surprising to me if it’s approached by a SPAC sponsor without needing to seek one out.
If that hasn’t happened yet, reach out to your network of accountants, attorneys and other advisors, who may be able to refer you to bankers that can connect you with SPAC sponsors.
As a potential target looking to be acquired, companies can also seek out SPACs that are specifically targeting investments in your company’s industry. A few examples include renewable energy, fintech, healthcare, and biotech. I’d go about it by identifying SPACs with prominent leadership, directors, and advisors in your sector.
