In addition, there are a number of tax challenges and complexities for financial statement and tax reporting purposes that should be considered up front. [7]. In addition to the private placement, most sponsors contemplate making working capital loans to the SPAC, of which typically up to $1.5 million in principal amount of such loans may be converted into warrants (identical to the private placement warrants) at the closing of the de-SPAC transaction. As compared to operating company IPOs (referred to herein as traditional IPOs), SPAC IPOs can be considerably quicker. In a remarkable departure from the 20% promote model, the sponsor (Pershing Square TH Sponsor, LLC) of a recent SPAC (Pershing Square Tontine Holdings, Ltd.) has not taken any founder shares. The restrictions apply to SPACs and former SPACs for varying periods depending on the specific rule. Also, the targets management team will likely continue in their roles in the surviving company, while benefiting from a new partnership with a well known sponsor team. SPACs are required to have a majority of independent board members under stock exchange listing requirements, subject to the same phase-in exceptions as are applicable to all newly public companies. In addition, each SPAC's warrant agreement amendment thresholds may vary. The difference is largely mechanical, impacting how the warrants trade and are exercised. The proceeds of the forward purchase arrangement and/or the PIPE transaction are used to finance a portion of the purchase price for the business combination, meet minimum cash conditions required to consummate the business combination (including by compensating for redemptions of public shares by exiting investors) and fund the working capital needs of the surviving entity. Base Dividend Increased to $0.41 Per Share, Reflecting Improved Earnings Power of Fidus' Por On the other side of the ledger, SPACs offer founders and equity investors in growth stage private companies a viable alternative to a traditional IPO, with a shorter, more definitive and simpler runway to completion. SPAC Sponsorship - Compehensive SPAC Guide by ClearThink Capital (go back), 10SPACs are similar to blank check companies, which the SEC describes as a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person[. Upon consummation of the IPO, the units begin to trade on the applicable stock exchange. However, in recent years companies such as Whisker Seeker and Team Catfish have stepped up to the mark and filled a well-undeserved space the big name brands are lagging far behind. As a result, the SEC comments are usually few and not particularly cumbersome. This results in most De-SPAC transactions involving a public vote of the SPACs shareholders, which involves the filing of a proxy statement with the SEC, review and comment by the SEC, mailing of the proxy statement to the SPACs shareholders and holding a shareholder meeting. Exhibit 10.16 . We use cookies on this website to optimize user experience and site functionality and to give you the best possible experience. However, the transaction will need to be structured in a manner so that the SPAC does not become an investment company under the Investment Company Act of 1940. The redemption offer does not apply to the public warrantsthey remain outstanding regardless of whether the originally associated public share is redeemed or not, until they are exercised or otherwise cancelled or exchanged pursuant to their terms or a vote. Some sponsors compensate the independent directors of the SPAC through the sale of founder shares, at cost. As a practical matter, SPACs typically target business combination targets that are at least two to three times the size of the SPAC in order to mitigate the dilutive impact of the 20% founder shares. The warrant agreement provides that the terms of the public warrants generally can be amended with the approval of holders of 50% of the public warrants. 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). SPACs intending to seek an offshore target are organized mainly in the Cayman Islands, although a few SPACs have been formed in the British Virgin Islands and the Marshall Islands. To this end, most SPAC IPO prospectuses contain disclosure that says that the SPAC will only complete [a] business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires an interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940. Occasionally, readers of SPAC IPO prospectuses interpret this as a maximum size for a target business of two times the size of the SPAC. The Registered Agent on file for this company is Corporation Guarantee And Trust Company and is located at Rodney Square 1000 North King Street, Wilmington, DE 19801. Arabian Entertainment Company, Ltd Terminates Business Combination The sponsor will pay a minimal amount (e.g., $25,000) for the founder shares. INSIGHT: Private Equity and SPACsA Mutually Beneficial Relationship What Is a Special Purpose Acquisition Company (SPAC)? - Investopedia In addition to the contracts and documents described above, the SPAC also adopts bylaws in connection with its formation, which are relatively standardized among Delaware SPACs and contain customary provisions for a publicly traded Delaware corporation. This also marks the time when the issuing company is entitled to deduct the compensation expense on its corporate federal income tax return. SPAC Warrants and 8 Frequently Asked Questions. The purchase price paid by the sponsor for the founder warrants represents the at risk capital of the sponsor in the SPAC and is calculated as an amount equal to the upfront underwriting discount (typically 2% of the gross IPO proceeds) plus typically $2 million to cover offering expenses and post-IPO working capital. The U.S. capital markets have seen record levels of merger and acquisition activity over the last few years, including record use of special purpose acquisition companies (SPACs) to facilitate initial public offerings (IPOs). In most cases, a vote of the shareholders of the SPAC will be solicited to approve the business combination transaction with the target. The number of founder shares is sized to be 25% of the amount of public shares initially registered on the registration statement, but will be increased or decreased through a stock split, dividend or forfeiture to size the founder shares to 25% of the number of public shares ultimately sold. The sponsor of the SPAC will purchase warrants in an amount equal to the 2.0% upfront underwriting discount of the IPO (see below), plus funds to cover the offering expenses and expenses to find a target, with the aggregate price of the purchased warrants in most recent deals hovering between 2.3% to 3.0% of the gross IPO proceeds. The sponsor of the SPAC will purchase warrants in an amount equal to the 2.0% upfront underwriting discount of the IPO (see below), plus funds to cover the offering expenses and expenses to find a target, with the aggregate price of the purchased warrants in most recent deals hovering between 2.3% to 3.0% of the gross IPO proceeds. 139. According to reports in the financial press, the current SPAC market could not be more active. Here is an incomplete list of SPAC sponsors: Citigroup alum Michael Klein Chinh Chu, formerly of Blackstone Group Gary Cohn, formerly of the Trump administration and Goldman Sachs Reid Hoffman,. The owners of the sponsor (e.g., a private equity fund and the independent management team of the SPAC) may document their relationship and relative participation in the SPAC, such as the relative amount of the founder warrant purchase price each will fund, and economic ownership of the founder warrants and founder shares in the constituent documents. (go back), 6For example, the NYSE listing rules required a shareholder vote and imposed a maximum 40% redemption requirement as a condition to consummate the De-SPAC transaction. Sponsors and their investors get the opportunity to invest in a growth stage company or other attractive target, carefully selected to match their investment criteria, with substantial upside opportunity. In addition, the sponsor agrees not to transfer or sell the private placement warrants until 30 days after the completion of the business combination transaction with the target. The warrants essentially dilute any PIPE investors and any equity retained by the seller of the target business. If a business combination is not consummated, the deferred 3.5% is not paid to the underwriters, and instead, that amount is used with the rest of the funds in the SPACs trust account to redeem the public shares. Once a SPAC has completed its IPO, the sponsor will begin its search for an operating entity to combine with the SPAC. The warrant agreement also contains an obligation for the SPAC to register the issuance of public shares upon exercise of the public warrants. SPACs are required to either consummate a business combination or liquidate within a set period of time after their IPO. In a typical SPAC IPO, the public investors are sold units, each comprised of one share of common stock and a fraction [3] of a warrant to purchase a share of common stock in the future. View image. After the de-SPAC, the capital structure from the perspective of the target equity holders will oftentimes be similar to what it would have been had the target conducted an IPO. Such a business structure allows investors to contribute money towards a fund, which is then used to acquire one or more unspecified businesses to be identified after the IPO. (go back), 8For example, Please expand [your] disclosure, if accurate, to affirmatively confirm that no agent or representative of the registrant has taken any measure, direct or indirect, to locate a target business at any time, past or present. The team will also discuss the industry in which the SPAC intends to seek a target and the growth potential of companies in the industry. SPAC IPO. (go back), 3Occasionally, the unit includes a whole warrant to purchase a fraction of a share of common stock, rather than a fraction of a warrant. The warrants become exercisable on the later of (i) 30 days after the De-SPAC transaction and (ii) the twelve-month anniversary of the SPAC IPO. PBS - Wikipedia In a traditional IPO for an operating company, the underwriters typically receive a discount of around 6% to 7% of the gross proceeds, which is paid at the closing of the IPO. In addition, if the SPAC hits the outside date for consummating the De-SPAC transaction or seeks to amend its charter documents to permit an extended period to consummate the De-SPAC transaction, it will be required to redeem the public shares (or offer to redeem, in the case of a charter amendment) for their pro rata portion of the amount held in the trust account. Partner, National Corporate Tax and Mergers & Acquisitions Technical Practice Leader, Managing Director, National Corporate Tax and Mergers & Acquisitions, Business Restructuring & Turnaround Services, Total Tax Transparency & ESG Tax Strategy, Financial Institutions & Specialty Finance, Important Tax Issues When Navigating a SPAC Transaction, BDO Knows SPACs: Tax Treatment of SPAC Founders Shares, Special Purpose Acquisition Companies Resources page, Do Not Sell My Personal Information as to BDO Investigative Due Diligence, Strategic partners and management expertise; and. Many have been chief executive officers of public companies, M&A dealmakers and industry experts. A SPAC is a company formed to raise capital in a public offering, with the offering proceeds serving as a blind pool of funds held in trust to finance the acquisition of one or several unidentified targets. Stock exchange rules do not always require a vote by the SPAC shareholders, but the structure of the De-SPAC transaction (e.g., if the SPAC does not survive a merger or is re-domiciling in a different jurisdiction) may require a vote, and if more than 20% of the voting stock of the SPAC is being issued in the De-SPAC transaction (to the seller of the target business, to PIPE investors or to a combination), the stock exchange rules will require a shareholder vote. SPAC Organizational Documentation (charter, bylaws) Sponsor Constituent Documents (LLC agreement, etc.) In certain circumstances, such as the absence of an effective registration statement covering the common stock issuable upon exercise of the public warrants or at the option of management, the public warrants may also be net settled. These requirements include: In addition, the merger must meet certain continuity of shareholder interest, continuity of business enterprise and business purpose requirements. The 2023 BDO CFO Outlook Survey offers critical insights to support strategic decision-making and help your company thrive. In those cases, the sponsor purchases founder warrants at a price of $1.50, $1.00 or $0.50 per warrant, depending on whether the public warrants are exercisable for 1/3, 1/2 or 1 share, respectively. In its IPO, the SPAC offers units, with each unit comprising one share of common stock, typically designated as class A shares, and either a fraction of a warrant to purchase a share of common stock, or one warrant to purchase a fraction of one share of common stock. SPACs, as registrants with assets consisting solely of cash and cash equivalents, are shell companies under the Securities Act of 1933, as amended (the Securities Act), and forms and regulations thereunder. Many contain features to automatically extend the period if a definitive agreement or letter of intent is signed by the end of the specified period or upon contribution of additional capital into the trust account by the sponsor. Aria, a portfolio company of funds managed by the Infrastructure and Power strategy of Ares Management Corp (NYSE: ARES) ("Ares"), is being acquired for $680 million and brings a comprehensive. fund exits an investment and distributes the proceeds in accordance with the SPAC fund's partnership or operating agreement. How SPAC mergers work: PwC Warrants received by sponsors that have employment arrangements with the SPAC may be treated as compensatory warrants issued for services. Northwestern University admitted 8.9 percent of applicants to the Class Under stock exchange rules, the De-SPAC transaction must be with one or more target businesses or assets that together have an aggregate fair market value of at least 80% of the assets held in the trust account (excluding the deferred underwriting discount and taxes payable on the interest earned on the trust account) at the time of signing a definitive agreement for the De-SPAC transaction. spac sponsor llc agreement Additionally, the Sponsor had an incentive to minimize redemptions to "ensure greater certainty" that the SPAC could satisfy a closing condition to the merger agreement that at least $50 million be released to the combined company from the trust account at closing. January 14, 2022 - When a special purpose acquisition company (SPAC) completes an IPO, the proceeds are held in a trust account until the SPAC identifies a target company to merge with,. SPONSOR FORFEITURE AGREEMENT . NEWCOURT SPAC SPONSOR LLC SC 13D Filing Concerning NCACU on 2021-10-22 SPACs are formed by sophisticated financial practitioners, alternatively referred to as sponsors or founders. The proxy statement or registration statement will ordinarily be drafted while negotiations over the business combination transaction agreement are being conducted between the SPAC and the target. The De-SPAC process is similar to a public company merger, except that the buyer (the SPAC) is typically required to obtain shareholder approval, which must be obtained in accordance with SEC proxy rules, while the target business (usually a private company) does not require an SEC compliant proxy process. However, within 52 days after the IPO, the units are severed, and the class A shares, often referred to as the public shares, and the warrants, often referred to as the public warrants, may be traded separately. SPACs: Frequently Asked Questions | Perkins Coie The public warrants compensate the IPO investors for investing in a blind pool. A SPAC is a special purpose acquisition company that raises a pool of cash in an initial public offering, or IPO, and deposits the cash proceeds from the IPO into a trust account. 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. (go back), 4Although the shares issued upon conversion of the founder shares are of the same class as the public shares, their resale would need to be registered under the Securities Act or eligible for an exemption from the registration requirements. SPACs and Considerations for Accountants of Sponsors and - EisnerAmper The sponsor is often a new limited liability company formed solely for the purpose of sponsoring the SPAC. Most SPACs initially file their registration statement confidentially. In a traditional IPO, the underwriters typically receive a discount of 5%-7% of the gross IPO proceeds, which they withhold from the proceeds that are delivered at closing. [10] SEC regulations prohibit or limit the use by shell companies (SPACs) and former shell companies (former SPACs) of a number of exemptions, safe harbors and forms that are available for other registrants. The promissory note covers any organizational or offering expenses until the SPAC can repay the loan from the proceeds of the IPO and sale of the founder warrants at the closing of the IPO. The features of the SPAC world described in this primer give some insight into why this may be so. As described below, the De-SPAC transaction will require a proxy statement meeting the requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), or tender offer materials containing substantially the same information. Inside M&A Fall 2015 | View Full Issue - McDermott Will & Emery Historically, SPAC Sponsors needed to raise an amount to serve as risk capital or "sponsor capital" equal to between 3% and 5% of the projected public capital raise for the SPAC. There is a standard set of contracts and documents entered into in connection with the formation of the SPAC and the SPAC IPO. Finally, SPACs typically enter into agreements with their directors and officers to provide them with contractual indemnification in addition to the indemnification provided for in the charter. In determining to pursue a de-SPAC transaction, target equity holders will have to weigh these factors against the benefits of taking the de-SPAC route. Recently, the most common structure has been that the units sold in the IPO would include a half warrant, although one-third of a warrant is more common in larger IPOs. Prior to consummation of a business combination, after the public shares and the public warrants separate, investors will have separate liquidity opportunities in their public shares and their public warrants. This primer provides you with an introduction to SPACs. For federal income tax purposes, the warrants received are treated as investment warrants as long as the issuance of the warrants is not dependent on the sponsors employment status or in exchange for services provided as an employee of the SPAC. Sponsors may earn a substantial return on their at-risk capital and promote, in return for identifying suitable operating business combination targets. This will require the preparation, SEC review and dissemination to the SPAC shareholders of a proxy statement. These expenses include the (modest) legal fees and expenses, printing expenses, accounting fees, SEC/FINRA, NASDAQ/NYSE fees, travel and road show fees, D&O insurance premiums, and other miscellaneous fees. SHUAA SPAC Sponsor I LLC Sample Contracts | Law Insider In addition to understanding the benefits of using a SPAC, it is important that SPAC sponsors and shareholders of target companies understand and plan for the federal income tax consequences associated with SPAC structures. Effectively, if the De-SPAC transaction never occurs, the public shareholders get their money back and the public warrants, founder shares and founder warrants expire without value. Both the Nasdaq and the NYSE require as well that independent directors comprise a majority of the board, and that the SPAC have an audit committee and compensation committee made up of independent directors. Corporate law of foreign jurisdictions, such as the Cayman Islands, is not as well developed as its Delaware analog, and Cayman Islands law notably does not expressly permit waiver of the corporate opportunity doctrine. The 20% founder shares are often referred to as the promote.. Chase has a personality much like his best friend Cash. Read about the challenges and opportunities that could lie ahead. The sponsor will purchase founder shares prior to the SPAC filing or submitting a registration statement with the sec in connection with the SPACs IPO. As a result, at least 20% of the SPACs outstanding shares will be committed to vote in favor of a transaction, requiring only 37.5% of the public shares to achieve a majority vote and approve the transaction. The company's principal address is 6930 N. Defense and Space Manufacturing. In addition, the private equity manager will likely need to consider how to allocate investment opportunities between the SPAC and existing funds. The funds in the trust account are typically invested in short-term U.S. government securities [2] or held as cash and are released to fund (i) the business combination, (ii) redemption of common stock pursuant to a mandatory redemption offer (as described below in De-SPAC ProcessRedemption Offer), (iii) payment of the deferred underwriting discount and (iv) if any amounts remain, to cover transaction expenses and working capital of the company post-De-SPAC transaction. (See below.) In a number of recent SPAC IPOs, affiliates of the sponsor or institutional investors have entered into a forward purchase agreement with the SPAC, committing to purchase equity (stock or units) in connection with the De-SPAC transaction to the extent the additional funds are necessary to complete the transaction. Servicemaster Fm ApplicationAt ServiceMaster Facilities Maintenance, we SPAC financial statements in the IPO registration statement are very short and can be prepared in a matter of weeks (compared to months for an operating business). In addition, stockholders of former SPACs are required to hold their equity for a period of twelve months, measured from the date of the filing of the Super 8-K, before they can rely on Rule 144 under the Securities Act.