October 25, 2023

SPARCs: Moving Up in the World

In August 2021, in a series of blogs, John addressed the Pershing Square Tontine Holdings lawsuit alleging that PSTH is an unregistered investment company, the joint statement from 49 law firms challenging that assertion, and Bill Ackman’s announcement of his plans to dissolve PSTH. As John shared, the decision to dissolve hinged on the SEC’s approval of an offering by a new entity that is a variation on the usual SPAC playbook called a SPARC — special purpose acquisition rights company. Well, on September 29, Pershing Square SPARC Holdings announced that the SEC declared its registration statement effective and filed this 8-K.

The prospectus notes on the cover: “Our company is not a SPAC and we are not raising capital from public investors at this time” and “SPARs are a novel security with unique and important features.” The press release touts some unique benefits of the SPARC, as does Bill Ackman’s letter in the prospectus, which claims “SPARC builds upon the favorable investor-friendly features and superior investment alignment of PSTH compared with other SPACs with a number of material value-creating improvements.”

The press release and letter are worth a read. Here’s an excerpt:

By distributing SPARs for free to former PSTH stockholders and warrant holders, SPAR holders will not be required to invest capital until SPARC has: (1) identified a target; (2) completed its due diligence; (3) negotiated a transaction; (4) signed a definitive agreement; (5) received the required board votes and stockholder approval (provided by our Sponsor and sole stockholder); and (6) satisfied substantially all closing conditions that can be satisfied in advance, including regulatory approvals. Our structure eliminates the opportunity cost of capital for SPAR holders while we seek to identify and consummate a transaction.

For a quick primer on SPARCs — especially how they deviate from the traditional SPAC — check out this Wilson Sonsini alert, which concludes with these initial takeaways:

Although the SPARC structure appears to solve many issues for investors in SPAC IPOs, it is a novel and unique structure, so the investment community will need time to fully digest its benefits and drawbacks, which will likely depend on the success of the Pershing Square SPARC. Furthermore, the terms of the Pershing Square SPARC may differ materially from future SPARCs. The time required for potential market acceptance and the establishment of standard market terms will likely be extended due to the precipitous drop in investor interest in traditional SPACs and the uncertainty regarding the timing and scope of the final SEC rules for SPACs, including how those rules may apply to the SPARC structure.

Additionally, while the Pershing Square SPARC structure provides some assurances as to the minimum amount of post-closing cash, many of the issues that target companies face when considering a business combination with a traditional SPAC will continue to be issues when considering a combination with a SPARC. Those issues include limited certainty on the amount of post-closing cash, competing interests in setting the target’s pre-combination valuation, potential dilution from the sponsor warrants, uncertainty as to the timing and likelihood of closing the business combination from other closing conditions (e.g., the scope and duration of SEC review), limited post-closing public float prior to the target company’s lock-up expiring and onerous postclosing disclosure requirements.

I’m convinced non-law/finance/M&A folks already think we speak in gobbledygook, and “SPARC” isn’t doing us any favors. But so it goes, I guess.

– Meredith Ervine