SPAC

THE BUSINESS

-A form of sponsored finance-

A SPAC[1] is essentially a form of sponsored financing wherein the sponsor[2] agrees to undertake the endeavor of identifying a target investment and co-investing with the public stockholders, albeit by way of one common, listed entity rather than by way of a fund.[3] The process commences with the sponsor’s incorporation of a shell company which is then capitalized with sufficient funds to effect a public offering of its equity. Subject to limitations, the proceeds from the initial public offering of the publicly traded shell company are held in trust until the approval of a merger with a target company. The result is that the sponsor and the public stockholders will both be stockholders of the same publicly-traded entity. Subsequently, the stockholders may approve the proposed initial business combination and/or elect to redeem their shares for the cash held in trust. For those who redeem, the value received should be the same as the amount that was originally paid per share in the initial public offering.[4]

As with any risk-reward undertaking, the sponsor might be well rewarded in exchange for the significant risk that it undertakes at various stages of the transaction, from inception through post-close of the de-SPAC.[5] For example, the sponsor must: establish the company, engage counsel and accountants, identify and retain a management team, engage the underwriter, assist all parties in preparing the transaction material, participate in the initial public offering, identify a target company that will be approved by the stockholders, and so forth and so on.[6] Expenses related to effecting a SPAC offering can easily exceed several million dollars or more.[7] As a result, these expenses must be planned as a part of the capitalization of the company so that it will have adequate funds from inception through post-initial-public-offering. The sponsor contributes capital to the company at its own risk.[8] Since, the company is mostly worthless at the early stage of the process, the sponsor receives many shares in exchange for its investment.[9] Subsequently the sponsor again places funds with the company, typically contemporaneously with the initial public offering.[10]

More specifically, the sponsor’s initial responsibilities are as follows.

(1) Legal fees related to the cost of incorporation: this includes the actual cost of filing the initial and amended certificates of incorporation with the state as well as counsel’s fees for the preparation of such papers. (Other fees may include, for example, an assessment on the company’s stated capital (e.g., Delaware[11]). It is common practice that the amended certificate include the terms that actually cause the company to function as a SPAC (e.g., the appointment of independent directors on a staggered board so as to accommodate the anticipated public-company, corporate-governance standards;[12] incorporation of terms as to the company’s permitted use of public stockholder funds received and held in trust;[13] and documentation of the timing mechanisms,[14] etc.[15]).

(2) Accounting and audit fees related to the preparation of the financial statements: in satisfaction of the prerequisite requirements for publicly offering its stock, the company must produce audited financial statements.[16]

(3) Retention of management: how will the company remunerate its management team and is there sufficient capital for such compensation?[17]

(4) The underwriters’ and other fees: this could include an initial engagement fee as well as a discount or underwriting fee in connection with the initial public offering.[18] Other expenses related to the initial public offering will include: the roadshow, printing and other fees, exchange listing fees,[19] directors and officers liability insurance,[20] miscellaneous (includes the trustee and registrar / warrant agent fees), etc. Typically these fees will be set forth in the Use of Proceeds[21] portion of the prospectus.

(5) Securities counsel: After the underwriters’ fees, legal fees incurred for capital markets counsel might be the company’s largest expense item. This should include the preparation of the registration statement (on Form S-1[22] or other form for which the issuer might qualify[23]) and all underlying documentation, including: the warrants,[24] the rights,[25] and the private placement agreement.[26] In addition, counsel will need to review the underwriting agreement, the trust agreement, the transfer agent agreement, etc.

(6) Pragmatic guidance: For a list of the various phases of effecting a SPAC offering, see SPAC Documentation Index.[27]

The sponsor thus risks its time and capital until post-initial-business-combination.

-Comparison of SPACs to initial public offerings-

Private companies or their segments that might otherwise be acquisition targets for an investment fund or a SPAC instead might opt to raise additional funds by way of a traditional, initial public offering.[28] In such a scenario, the existing management of the private company might not be supplemented with another management team; this is in stark contrast to the SPAC model which initially relies almost entirely on the experience and thus marketability of its management team, whether seasoned operators of a particular industry or public-company-governance experts.[29] The process to close the transaction might also take longer than an acquisition by a SPAC, an investment fund, or another strategic investor.[30]

In response to criticism about the cost of a SPAC, i.e., the underwriters’ fees and the sponsor’s promote,[31] an initial public offering can be just as expensive when considering the underwriters’ fees and the initial public offering discount.[32] In addition to the standard fee of approximately, 3.5% - 7%, the average first-day return[33] associated with an initial public offering in 2020 was 38%[34] while the historical average (1980-2020) was 18.4%,[35] which for an issuer, might seem like a lost opportunity since the “lost value” is only realized by the seller in the secondary market. Somewhat similarly, in the case of the sponsor promote, the sponsor as a selling shareholder in a secondary market transaction unlocks significant value that escapes the company’s balance sheet; however, in exchange for the de minimis, paid-in, economic value, the sponsor creates value by causing the company to become a public reporting shell with a seasoned management team during the restricted holding period[36] applicable to the sponsor’s shares. In the initial public offering of a private company, those founder shares might be attributable to prior value creation or the issuance could be new. 

Thus for the SPAC, the promote serves as delayed, incentive-based compensation for the sponsor who theoretically will deliver value by causing the initial public offering and the subsequent de-SPAC; the warrants and rights serve as an incentive for those who invest in the initial public offering which initially has very little risk as a result of the trust; and the management team supplements the pre-existing team of the initial business combination target. In the case of an initial public offering of a private operating company, the selling shareholders may unlock a first-day return for some of their holdings while traders in the secondary market might anticipate the “IPO pop” effect (which essentially functions as a primer that encourages new money participation in the offering); in the case of the company’s issuance of new equity, the distinct economic incentive of management after initial public offering lock-ups have expired may be intuitive.

-Comparison of SPACs to private equity funds-

SPACs, initial public offerings, and strategic investors (such as a competitor or a conglomerate) aside, other potential purchasers of private companies include investment funds. Such acquisitions would typically be made by qualified investors[37] acting as partners in a limited partnership’s acquisition of the company. This sector of finance is known as private equity since the general partnership does not typically make a general solicitation to the public and instead relies on non-publicly sourced capital for the acquisition of the equity tranche of the target (which is accompanied with a significant amount of debt on the target’s balance sheet). Such partnership-sponsored investments, like a SPAC, would include seasoned management advisors for the target and/or its board of directors as well as incentive-based compensation for incumbent management.[38] The equivalent of sponsors in this arrangement would be the general partnership entity of the private equity partnership purchaser.[39] SPAC sponsors and general partners of private equity funds are compensated differently.

Most distinctively, the investment decision traditionally remains exclusively with the general partner or its selected investment advisor to the fund whereas with SPACs the decision as to the initial business combination is a matter for all stockholders. SPACs thus bring the professional world of private equity to the public markets for all. However, a significant concern is that of discretion. In the case of private equity, the limited partners might be sovereign wealth funds, family offices, pension funds, and others with significant staff, experience, and resources for evaluating the probability of the manager’s ability to effect a successful result; moreover, because each acquisition relies significantly on the issuance of debt, another layer of analysis will support the transaction. In the case of a SPAC, retail investors typically are not a part of a large staff of dedicated financial professionals and comparatively have limited resources for making such evaluations.

-Dynamic incentives for SPAC participants-

Beyond asymmetrical or non-synchronous de-risking for the various investors participating during the lifecycle of the SPAC, from pre-incorporation through post-IPO initial business combination, other elements of risk and reward exist in the SPAC format that encourage capital formation. For example, the underwriters immediately earn a fee in connection with the SPAC’s primary offering of securities (the “IPO”) and effectively have diminished risk for distributing what is essentially a money market investment with the additional economic incentives, depending on the transaction, of the other bundled securities (e.g., warrants and rights serving as a promotional gimmick).[40] Subsequently the underwriters have the opportunity for an additional fee if they can successfully facilitate the SPAC’s initial business combination (the “de-SPAC”). The sponsor, while undertaking significant initial risk,[41] has a significant chance of a positive return post-initial-business-combination provided that various investment risk criteria can be successfully predicted and/or mitigated. As for the initial public equity investors, the investment prior to a proxy or a tender offer is nearly the same as cash with the additional benefit of the bundled securities (e.g., the warrants and rights which after bifurcation serve as an economic bonus if the transactions go well). For those otherwise holding cash, it can be an opportunity to acquire many warrants and rights, while maintaining an economically similar investment in cash-equivalents,[42] exiting prior to the de-SPAC.[43] For long-term investors, including the sponsor and the target company’s pre-existing stockholders, the reward for one’s effort should be not petty.

-Conclusion-

Depending on the duration-based measurement of performance, a SPAC and its sponsor may or may not match the criteria of the investor. Likewise, the investor might not match that of the sponsor.[44] SPACs present significant initial risk and expense for sponsors while the longer-term risk-reward element can be much more favorable so long as an initial business combination, any initial business combination, is effected. Public stockholders face the inverse: reduced initial risk,[45] followed by significant risk at the time of and after the merger. Thus like any investment, the results cannot be predicted and public stockholders as well as sponsors must carefully evaluate how to allocate their risk capital. One might ask: can this management team identify a company and somehow unlock value? Or, will the valuation difference between the value of a privately-held company and a publicly traded company be sufficient to unlock value regardless of management? Given recent market developments, are there enough privately held companies such that an acquisition premium will not destroy the public stockholders’ return on equity? If the sponsor must effect an initial business combination under almost every scenario, what will ensure price fairness? What is the probability of a failed de-SPAC as a result of excessive redemptions and can a forward purchase agreement or a private investment in public equity help mitigate this risk?[46] How long will the investment be held and will that holding period be sufficient for the emergence of the preferred performance?

THE LEGAL STRUCTURE

-Historical context-

Generally, Special Purpose Acquisition Companies (known as “SPACs” or a “SPAC”), are a type of blank check company. A blank checks is a development stage company that has no specific business plan or purpose or has indicated that its plan is to engage in a merger or an acquisition of another as yet to be identified company, entity, or person. The SPAC is an evolved form of the blank check company which emerged in the 1990s in response to the U.S. Securities and Exchange Commission’s adoption of Rule 419[47] regulating blank check companies. The rule was a response to a period of rampant fraud and abuse in the offerings of blank checks, and it provides for various investor safeguards.[48] SPACs are factually and therefore legally distinct from Rule 419 blank checks. “In the past two years [. . .] the U.S. securities markets have experienced an unprecedented [increase in SPAC offerings], with SPACs raising more than $83 billion in [. . .] 2020 and more than $160 billion in [. . .] 2021. In 2020 and 2021, more than half of all initial public offerings were conducted by SPACs.”[49]

-Regulation 1600 – SPAC Specific Federal Rules-

Commencing with a new subpart 1600 of Regulation S-K, the Commission proposes special disclosure requirements for SPACs as concern the sponsor, potential conflicts of interest, and the effects of dilution. Other requirements include modifications to the requirements for the cover and summary portion of the prospectus. In addition, enhanced disclosure for de-SPAC transactions, including a fairness determination requirement are proposed.

The Commission noted the legislature’s concern, quoting in the rulemaking proposal public statement:

H.R. No. 85, 73d Cong., 1st Sess. (1933) (From the Introductory Statement to the Report submitted by Mr. Rayburn, Committee on Interstate and Foreign Commerce: ‘Honesty, care, and competence are the demands of trusteeship. These demands are made by the bill on the directors of the issues, its experts, and the underwriters who sponsor the issue. If it be said that the imposition of such responsibilities upon these persons will be to alter corporate organization and corporate practice in this country, such a result is only what your committee expects.’). [50]

. . .

Consistent with this intent, the Commission has stated that the due diligence efforts performed by underwriters are central to the integrity of our disclosure system.[51]

-Other Rules-

Beyond Regulation S-K Part 1600, SPACs are governed by numerous and voluminous other rules, primarily federal securities regulations in connection with the public listing of its securities in the IPO. The Securities Act of 1933 and The Exchange Act of 1934 are the principal federal laws that provide the framework for public bourses in the USA. For example, these laws and the rules made by the attorneys and economists working for the U.S. Securities and Exchange Commission provide standardized data forms and types of legal and accounting disclosure required in connection with public listings of securities. For example, public offerings are pursuant to section 5 of the Securities Act and 12 of the Exchange Act. Accounting rules are provided by Regulation 17 CFR Part 210 and qualitative and quantitative disclosure concerning the issuer’s securities are provided by Regulation S-K amongst many other rules promulgated by the Commission.

-Corporate Laws-

Almost all SPACs are initially established in an offshore jurisdiction with more favorable or specialized corporate and tax codes that work better within the context of potentially multi-jurisdictional or as yet to be determined jurisdictions of operation. Some SPACs incorporate in Delaware. A SPAC can change its jurisdiction of incorporation easily in connection with its initial business combination and can even de-list in connection with its merger into its target since, even though it is a standardized form, it remains incredibly bespoke in its various possible implementations.

The author is familiar with Delaware, the national standard for big, public companies in the USA, by statistics and matched by pedagogy. Thus in the case of a SPAC incorporated in Delaware, it is important to note the standard Delaware corporate laws that apply and the modifications to same by the certificate of incorporation of the SPAC or other contractual agreements, which will provide certain voting thresholds, for example, for management’s control of the board appointments prior to its de-SPAC (ensuring that sponsors do not lose an element of quasi-control prior to effecting their risk-expertise strategy in producing a superior return on investment), for the voting thresholds on the de-SPAC transaction (since this, depending on transactional form, could be more than one standard), and for waiver of other standards of corporate contract statutorily or otherwise provided by the jurisdiction.

-Contract and Other Laws-

The securities exchange upon which the securities are listed will have an extensive set of rules that apply. Since the underwriters will be primarily in New York, possibly in London, the underwriting agreement likely will be governed by New York law or possibly some other law than the jurisdiction of incorporation. Other agreements subject to differing regimes include the trust agreement with the custodian bank which will hold the funds in trust until the time of closing on the initial business combination and/or the securities custodian who manages the stockholders’ ledger.

[1] A SPAC is a type of a blank check public offering, not to be confused with the limited definition of “blank check company” as defined in Rule 419. In economic substance, both are similar, yet in legal form, both are subject to different rules and procedures throughout the investment life cycle.

[2] “One important trend in the SPAC market is that 76% of the 2019 SPAC IPOs were sponsored by industry executives, up from 65% in 2018 and 32% in 2017.” Jefferies Fin. Grp. Inc., AI: Increasing Number of SPAC Founding Sponsors are Industry Executives, https://www.jefferies.com/OurFirm/2/1616#:~:text=One%20important%20trend%20in%20the,and%20are%20seeking%20new%20opportunities. (last visited July 15, 2022).

[3] The difference is significant in that the general partner (which would be the nearest equivalent of the sponsor from the SPAC model) maintains more control in the private equity model because the investors are limited partners and are subject to an agreed term that must expire prior to any capital draws. The investment risk also typically is dispersed across multiple investments. In the SPAC model, subject to pre-merger limitations in the certificate of incorporation and absolute ownership percentages, the sponsor generally is not guaranteed control of the investment post-initial-business-combination and the investment risk typically is concentrated in a single investment. Most distinctively, in a SPAC all investors participate in the investment-decision-making process.

[4] This is because the sponsor’s private placement that occurs contemporaneously with the initial public offering will be in an amount that is adequate to pay the underwriters’ fee or discount as well as to compensate for any other gap in funds such that the SPAC’s trust account will be funded at 100% or more of the initial public offering price.

[5] The term de-SPAC refers to the transaction that causes the funds to be disbursed from the trust and is also referred to as the initial business combination (typically a defined term in the SPAC’s certificate of incorporation that includes an acquisition, a merger, or some other equivalent of an economic investment of substantially all of the company’s assets). Typically the disbursement might be to the target entity’s shareholders and/or the combined new entity’s balance sheet. The funds might also be released as a function of fulfilling stockholder redemption requests.

[6] At any phase of the SPAC’s life cycle, a problem could arise that could prolong the transaction which thus might increase the risk and expense borne by the sponsor. In the worst-case scenario, the market for initial public offerings might not be available or the company’s expenses might surpass the anticipated budget. For example, if directors and officers liability policies are excessively priced as a consequence of a SPAC glut this may negatively affect the marketability of the offering. See generally Teresa Milano and Jonathan Walton, Turbulent Times for SPACs: Ripples Through the D&O Insurance Market, Fall 2021 A.B.A. Sec. Tort Trial and Ins. Prac.: The Brief (Vol. 51, No. 1), https://www.americanbar.org/groups/tort_trial_insurance_practice/publications/the_brief/2021-22/fall/turbulent-times-spacs-ripples-through-d-o-insurance-market/ (providing a synopsis of the relevant issues for directors and officers policies for SPACs); see also Bethan Moorcraft, The D&O liability marketplace has made its correction, Insurance Business (Mar. 24, 2022), https://www.insurancebusinessmag.com/us/news/professional-liability/the-dando-liability-marketplace-has-made-its-correction-399932.aspx (discussing the causes of the significant fluctuation in the directors and officers policy marketplace for SPAC entities).

[7] A sponsor should anticipate committing at least 2.5%-3.5% or 3%-4% of the publicly raised amount. Bazerman & Patel, supra note 10; Jefferies Fin. Grp. Inc., supra note 7.

[8] Even in the case of a firm commitment initial public offering which would alleviate significant risk for the sponsor, there is still no guarantee that an initial business combination will ever occur (in which case the sponsor would lose its entire investment).

[9] This practice is congruent with the standard phases and valuations of nascent-to-publicly-traded-corporation valuations of the venture capital industry. See generally, Alejandro Cremades (Former Contributor), How Funding Rounds Work for Startups, Forbes (Dec. 26, 2018), https://www.forbes.com/sites/alejandrocremades/2018/12/26/how-funding-rounds-work-for-startups/?sh=25a7a5c73866 (describing the multi-tiered investment life cycle); see also supra note 12.

[10] Just prior to the company’s initial public offering, a private placement by the sponsor will provide the remainder of funds needed. This investment will be sufficient to pay the underwriters’ fees and all other professional fees that must be paid so as to cause the company to become a reporting entity with equities listed on an exchange. At the time of the effectiveness of the company’s registration statement, the company has been capitalized, its financial statements have been audited, and its management team has been appointed. As a result, the company’s value has significantly increased from its initial capital contribution, and the sponsor thus receives less for its investment. Note that the sponsor still risks its entire investment as discussed supra notes 14 & 16.

[11] Del. Code tit. 8, § 391 (2022).

[12] See generally NYSE Listed Company Manual §§ 303.A00 et seq. (2022); The Nasdaq Stock Market LLC Rules § 5600 et seq. (2021).

[13] For example, the funds should be held in escrow with a trustee and maintained by an investment manager. The manager should be restricted to causing the trust to hold only direct U.S. Treasury obligations (which are United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940) having a maturity of 180 days or less, or money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 and which invest only in direct U.S. Treasury obligations. Such an investment strategy ensures the safety and soundness of the funds being held until such time as an initial business combination and also are designed to assist the SPAC in avoiding being deemed an investment company under the Investment Company Act of 1940. See SPAC Proposal Release, supra note 5, at 135 n.294; see generally id., supra note 5, at 135-160 (Mar. 30, 2022) (discussing the market practice of SPACs within the context of historical interpretations of the rules as related to Rule 419 blank checks and proposing a safe harbor).

[14] The certificate of incorporation should provide the maximum allotted period of time for which the corporation may exist as well as, if applicable, the procedure for dissolution and winding up or approval of any extension or other modification.

[15] For example, other terms might include non-standard voting thresholds, an additional class of shares, and consideration of the merger approval requirements within the context of the company’s intended purpose. See Del. Code tit. 8, §§ 215, 151, & 251(h) (2022).

[16] Reg. S-X, 17 C.F.R. 210.3-01 et seq., 210.8-01 et seq. (2022).

[17] In addition to the sponsor’s determination as to whether the management team will be suitable, the underwriters must take the lead in performing adequate due diligence of these individuals. The importance of the underwriters’ role in this process has been emphasized by the Commission in its most recent proposed rulemaking to amend various rules applicable to SPACS. See generally SPAC Proposal Release, supra note 5, at 90-94 (Mar. 30, 2022). Counsel, including the issuer’s counsel, should have the opportunity to and should rigorously examine all documentation and assertions upon which the underwriters claim reliance in making a determination as to the approval of the management team to proceed as a part of the listed entity and therefore the initial public offering. See 15 U.S.C. 78t.

[18] The post-initial-business-combination surviving entity might also pay the underwriters again at the time of the de-SPAC so long as the underwriters are successful in assisting the SPAC to effect its initial business combination.

[19] See generally NYSE Listed Company Manual §§ 902.02, §902.11 (2022); see The Nasdaq Stock Market LLC Rules § 5900 et seq. (2021).

[20] See generally Milano and Walton, supra note 14.

[21] Reg. S-K Item 504 Use of proceeds, 17 C.F.R. § 229.504 (2022).

[22]  Form S-1 is the default. 17 C.F.R. § 239.11 (2022); U.S. Sec. and Exch. Comm’n, https://www.sec.gov/files/forms-1.pdf (last visited July 5, 2022).

[23] Certain foreign issuers must use Form F-1. 17 § C.F.R. 239.31 (2022); U.S. Sec. and Exch. Comm’n, https://www.sec.gov/files/formf-1.pdf (last visited July 5, 2022).

[24] Beware whether the terms of the warrants trigger debt instrument classification rather than equity. See generally John Coates & Paul Munter, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), U.S. Sec. and Exch. Comm’n (April 12, is 2021), https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs (discussing the factors relevant to a determination as to whether warrants should be characterized as debt or equity).

[25] Del. Code tit. 8, §157 (2022).

[26] See §4(a)(2) exemption under the Securities Act of 1933. 15 U.S.C. § 77d (2022).

[27] John Jeffrey Mohney, SPAC Documentation Index, Mohney LLC (July 19, 2022), https://www.mohney.llc/the-archived-shelf/spac-documentation-index (providing a list of tasks and deliverables for establishing a SPAC).

[28] See Divestitures, Boston Consulting Grp., https://www.bcg.com/capabilities/mergers-acquisitions-transactions-pmi/divestitures (last visited July 16, 2022) (discussing the benefits of strategic divestitures).

[29] See generally Kurt Chauviere, Alastair Green, & Tao Tan, Earning the premium: A recipe for long-term SPAC success, McKinsey & Co. (Sept. 23, 2020), https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/earning-the-premium-a-recipe-for-long-term-spac-success (discussing that an evaluation of management’s qualifications and experience can be indicia of the SPAC’s potential for long-term success).

[30] The average initial public offering takes at least six to nine months under ideal conditions. See generally Private company IPOs in the United States, Deloitte: Perspectives https://www2.deloitte.com/us/en/pages/audit/articles/private-owned-company-initial-public-offering.html (last visited July 5, 2022) (providing a description of the initial public offering process for an operating company).

[31] The sponsor’s promote (also typically referred to as the “founder shares”) is the sponsor’s initial de minimis capital contribution to the company that subsequently will typically represent approximately 20% of the post-initial-public-offering equity of the company. Although Rule 144 and the SPAC-specific letter agreement limit when a sponsor may realize the increase in value, the initial public offering effectively dilutes new shareholders in the name of the sponsor promote (absent redemptions and presupposing an initial business combination).

[32] Professor John C. Coffee, Jr., The Irrepressible Myth That SEC Overregulation Has Chilled IPOs, Columbia law school: The CLS Blue Sky Blog (May 29, 2018), https://clsbluesky.law.columbia.edu/2018/05/29/the-irrepressible-myth-that-sec-overregulation-has-chilled-ipos/ (discussing whether regulation is a source of friction in the initial public offering marketplace) (citing a study by PriceWaterhouseCoopers that attributes greater than 70% of the cost of an initial public offering to the underwriters’ fees).

[33] This is colloquially referred to as the “IPO pop.”

[34] Phil Mackintosh, Trends in IPO Pops, Nasdaq (Mar. 4, 2021), https://www.nasdaq.com/articles/trends-in-ipo-pops-2021-03-04 (“[In 2020,] 471 companies (including SPACs) came to market, representing a record level not seen since 1999. We also noted that newly listed initial public offerings (excluding SPACs) in 2020 saw an average first-day return, commonly called an ‘IPO Pop,’ that was more than double the longer-run average, at 38%. . . .”).

[35] Id. (citing Jay R. Ritter, Initial Public Offerings: Updated Statistics, at 69, U. of Fla., Warrington Coll. of Bus. (June 20, 2022), https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf (providing statistical data and analysis of initial public offerings).

[36] By way of a registration rights agreement, typically the sponsor will have the right to demand that the company cause the sponsor’s shares to be registered. Resales of unregistered securities of SPACs under the Rule 144 safe harbor are not available until one year post-close of the initial business combination, and various other conditions must be met: continuous and current satisfaction of all reporting requirements for the trailing-twelve-month period including a Form 10 filing re: status change, rate-limiting pursuant to subpart (e), and other technical requirements such as notice and method of transacting. 17 C.F.R. 230.144(i). Absent a safe harbor, re-sellers must be careful to avoid being deemed an underwriter in connection with a 4(a)(1-1/2) transaction which may require evidencing intent by way of exceeding a de minimis holding period of two years. See Revisions to Rules 144 and 145, Securities Act Release No. 33-8869 (Dec. 6, 2007), 72 Fed. Reg. 71546 (Dec. 17, 2007) (amending Rule 144); See also Rob Evans, Stanley Keller, & Eugene W. McDermott Jr., SPACs and Legend Removal Opinions, A.B.A: Business Law Section (Jan. 24, 2022), https://www.americanbar.org/groups/business_law/publications/blt/2022/02/spacs/ (discussing the pragmatics of transacting in restricted securities of SPACs).

[37] These arrangements are typically structured in a manner that requires no or de minimis registration.

[38] “Managers of companies owned by private equity have more skin in the game—the CEO typically gets about 5% of the equity and the management team about 15%, compared with less than a few percent in publicly traded companies. Boards are smaller and tend to monitor executive performance more closely. Operational teams make detailed plans to improve performance.” M. Todd Henderson & Steven N. Kaplan, Populists Don’t Know Much About Private Equity, The Wall St. J.: Op. (June 30, 2020), https://www.wsj.com/articles/populists-dont-know-much-about-private-equity-11593557292 (deflecting criticism of the private equity model while providing a pragmatic definition of it and some of its effects).

[39] The general partner entity, often a limited liability company, might need to register as an investment advisor under the Investment Advisors Act of 1940, 15 U.S.C.S. § 80b-2(a)(11); but cf. section 3(c)(7) of the Investment Company Act of 1940, 15 U.S.C.S. § 80a-3 (2022).

[40] See discussion supra “A form of sponsored finance”.

[41] Supra note 16.

[42] This is because the proceeds from the initial public offering are held in a trust account that pursuant to a rule under the Investment Company Act of 1940 invests only in U.S. treasury securities. Most SPACs rely on this rule so as to avoid needing to register as an Investment Company. Also, SPACs offer their common stock by way of units which are securities that couple the common stock with warrants and, if applicable, rights. After a certain period of time, the unit bifurcates into its constituent securities, all of which commence separate trading. Thus an initial investor who purchases a single security (the unit) will soon have multiple securities, each of one share of common stock, some number or warrants (each representing a whole share or a fraction thereof), and a right (typically denominated in a fraction of a single share of common stock).

[43] SPAC Proposal Release, supra note 5, at 11 n.17 (discussing various redemption rate studies); At the time of the de-SPAC, a proxy or a tender offer is made wherein the shareholders can elect to redeem their shares for cash regardless of whether they vote for or against the proposal. In theory, the initial public offering participants might find the right time to sell their shares after the initial public offering at the original price paid while retaining the bifurcated warrants and rights.

[44] Hence the introduction of a forward purchase agreement which can assist in reducing transaction uncertainty.

[45] The initial risk is de minimis because all funds are placed in the trust fund.

[46] See supra note 11.

[47] 17 C.F.R. 230.419. See Blank Check Offerings, Securities Act Release No. 33-6932 (Apr. 13, 1992), 57 Fed. Reg. 18037 (Apr. 28, 1992) (adopting Rule 419 pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. 101-429, 104 Stat. 931 (Oct. 15, 1990)).

[48] For example most of the gross proceeds from the public offering as well as all of the publicly offered shares must be held in escrow until consummation of an initial business combination wherein the net assets to be acquired represent at least 80 percent of the maximum offering proceeds.

[49] Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act Release No. 33-11048; Exchange Act Release No. 34-94546; Investment Company Act Release No. IC-34549 (Mar. 30, 2022), 87 Fed. Reg. 93 (May 13, 2022) [hereinafter SPAC Proposal Release] (proposing various rule changes intended to enhance investor protections in the SPAC marketplace).

[50] SPAC Proposal Release, supra note 5, at 90, n.180.

[51] SPAC Proposal Release, supra note 5, at 91.

See also Accounting Basics Explained via a SPAC and Public Company Mergers and Acquisitions.