August 17, 2018
The Skinny on SPACs: From Dawn to “De-SPAC”
This Vinson & Elkins memo provides a nice overview of the process of putting together a Special Purpose Acquisition Company (SPAC), financing it, and ultimately “De-SPACing” the entity through an acquisition. This excerpt from the intro summarizes the life cycle of a SPAC:
SPAC will go through the typical IPO process of filing a registration statement with the SEC, clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. Offering expenses, including the up-front portion of the underwriting discount, and a modest amount of working capital will be funded by the entity or management team that forms the SPAC (the “sponsor”). After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the “business combination”).
If the SPAC needs additional capital to pursue the business combination or pay its other expenses, the sponsor may loan additional funds to the SPAC. In advance of signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (“PIPE”) commitment, to finance a portion of the purchase price for the business combination and thereafter publicly announce both the acquisition agreement and the committed financing.
Following the announcement of signing, the SPAC will undertake a mandatory shareholder vote or tender offer process, in either case offering the public investors the right to return their public shares to the SPAC in exchange for an amount of cash roughly equal to the IPO price paid. If the business combination is approved by the shareholders (if required) and the financing and other conditions specified in the acquisition agreement are satisfied, the business combination will be consummated (referred to as the “De-SPAC transaction”), and the SPAC and the target business will combine into a publicly traded operating company.
– John Jenkins