Special Purpose Acquisition Companies – or SPACs – are newly incorporated companies with no commercial operations, formed specifically and strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Although they have existed for some time, they have recently seen a resurgence the United States market. DAC Beachcroft consultant Clive Garston explains why the SPAC may also become popular in the UK for both domestic and overseas investors.
A SPAC, also known as a blank check company, is a newly incorporated company which carries out an IPO on public markets. It raises capital from investors on the basis of the reputation of the management team and with the intention of identifying a target company to acquire by way of a reverse merger. The investors receive shares and, possibly, warrants in the new company, together with the management team. The SPAC has a specific period of time - usually two years - in which to identify a target company with which to merge. If this does not happen the SPAC will be dissolved and the funds will be distributed to the shareholders. During the intervening period the funds are held in a trust structure.
SPACs have proved to be popular because the target company knows that the funds have been raised and that there is no fundraising risk. From the point of view of investors, both institutional and retail, SPACs represent an opportunity to back the management team and also to invest in a semi venture capital type structure with the liquidity of the capital markets.
The SPAC structure has potential to become popular in the UK. Companies can be incorporated, although there are minimum limits to the amount of capital which has to be raised; for example, on AIM this is £6 million. When a UK shell company makes an acquisition it is treated as a reverse takeover and in effect the shell company has to apply for readmission as if it were a new applicant. These issues may be regarded as technical but the regulator may, in due course, look to facilitate the listing of such companies.
