Concept of Special Purchase Acquisition Companies (SPACs) is not new. This concept has existed for the last 3 Decades. However, this method of funds raising has gain popularity since the advent of COVID-19 pandemic.
Special Purpose Acquisition Companies (SPASC), also known as blank Companies, is a shell company with no operations. Such companies are created for the sole purpose of raising funds through Initial Public Offers (IPO). Special purpose acquisition companies (SPACs) have become a preferred way for many experienced management teams and sponsors to take companies public.
In this article a detailed is carried out about SPACS, its features, advantages, legal status in India:
1. What is a Special Purpose Acquisition Companies (SPACS)
- SPACS is a Shell company or blank companies, without any operations, which are created for the sole purpose of raising funds through Initial Public Offers (IPO).
- Subsequently, an operating company can merge with (or be acquired by) the publicly traded SPAC and become a listed company instead of executing its own IPO.
- SPACs were first created in the 1990s, but they didn’t gain popularity with blue-chip investors until recently.
2. Why Companies are joining SPACS
Very common question comes up is why a company gets merged with or acquired by SPACS instead of bringing his own Initial Public Offers. There are some following reasons of joining SPACS:
a. Access to Capital:
- It is not easy for a company to bring an IPO as every IPO needs to be subscribed to a minimum extent.
- Various Small and mid-sized companies may want to continue to fund development, invest in brand awareness or make acquisitions to continue growing, but they may not be ideal candidates for traditional IPOs.
- By merging with a SPAC, such companies can have access to public funds and can also retain a stake in their business which would not be otherwise possible for them.
- The pool of capital available from SPACs has widened significantly. As these investment vehicles continue to evolve and mature, companies will likely have more SPACs to consider.
b. Market certainty
- Listed Companies are required to be managed very carefully otherwise bringing an Initial Public Offer can be a failure and a Company end up incurring only costs.
- Also, prices in share market fluctuates very drastically and it can make shares of a company too sensitive to invest.
- SPACS are already formed and Managed by team of experts. Therefore, merged entities are not required to be bothered about Market volatility.
c. Team of Experts:
- A SPAC is organized and managed by a sponsor, who is typically a sophisticated investor and commercial operator.
- SPACS are generally created and managed by renowned private equity groups and experienced management teams, which in turn could spawn higher standards when it comes to fundraising, returns on investments and therefore further build investors’ confidence.
- SPACs behave much like PE firms in that a group of investors raise funds to strategically buy companies – the main difference being that the SPAC executes a public versus private offering.
d. Flexible Deal Terms
- In case of own IPOs, a Company have to accepts the funds from public subject to compliance of law prevailing.
- However, SPACs present target companies the flexibility to negotiate other terms of the deal that work in their favor such as valuation negotiation.
- This could also include structuring the transaction to bring in additional dollars through a private investment in public equity (PIPE), as well as add additional debt or equity.
e. Early Access to Funds
- A company may take period of 12-24 months to obtain funds through IPO. However, funding through SPACS takes time period of 5-6 months.
- Therefore, SPACS facilities early access to funds
3. Key Features of SPACS
a. Funds held in Trust Account:
- SPACS are required to hold proceeds from the public offer in a trust account.
- Such funds can be utilized for the purpose specified in the offer documents issued at the time of IPO and is subject to permissible debits as per applicable law
b. Time period for target acquisition:
- A SPAC is required to connect with an unlisted company (a de-SPAC Transaction) within the time period given from the date of public issue date (as set out in the offer document).
- If such a transaction does not take place within a specified period of time then SPAC may seek approval from its shareholders for an extension of the time.
- In some cases, SPAC may also dissolve and liquidate its assets and return the amount invested in the SPAC to its shareholders.
c. Process of target acquisition:
- At the time of raising capital through public offer, the SPAC are not required to identify the specific target that will be acquired by the SPAC. However, offer document sets out the key sectors or financial conditions of the target that the SPAC may be looking to acquire.
- Once the target is identified, approval of the majority shareholders (including public shareholders and institutional investors) of the SPAC is sought for the combination with the identified target.
- The dissenting shareholders also have the right to redeem their shares (or warrants) at investment value if they do not wish to proceed with the combination.
d. PIPE transactions:
- SPACs often raise additional funds from private investors in the form of private investment in public equity (PIPE) transactions to reduce the financial impact of redemptions by dissenting shareholders prior to the de-SPAC transaction, meet any fund shortfall faced by the SPAC or for any future funding needs of the SPAC.
- Such PIPE transactions are undertaken after identification of the unlisted target and prior to the business combination with the unlisted target.
4. Concept of SPACS in India
- There is no regulatory framework related to SPACS in India under Companies Act, 2013. However, American Regulatory Framework specifically provides for the provision of SPACS companies.
- Further, having a SPACS is also not feasible in India due to various conditions given under Companies Act, 2013. Such as, a SPACS may not commence its business operation for 18-24 months till the time it finds its target company. However, as per Companies Act, 2013, every company is required to commence its operation within 6 months from the date of Incorporation.
- Also, as per SEBI guidelines, certain eligibility conditions are prescribed for public offers, which include requirements relating to minimum net-worth, operating profits and net tangible assets for earlier years. This is contradictory to the concept of SPACS which does not have any operations or assets till the completion of the de-SPAC transaction.
By merging with or acquired by a SPAC, companies get the benefit of capital access, experience team, low etc. However, Any company looking to go public via a SPAC will need to be prepared – just as they would if they were considering a traditional IPO. Companies are required to comply with audits and more stringent reporting provisions.
Concept of SPACS is not feasible in India considering the regulatory framework.