In the financial and legal world, there’s quite a bit of talk about Special Purpose Acquisition Companies (SPACs). These companies are corporate vehicles listed on a secondary market whose purpose is to acquire other companies with the idea of merging with them. The scenario is very similar to venture capital, with the difference being that with SPACs, the target company, and the nature of the future business is unknown. This is why they are also referred to as “blank check companies.”
A breakdown of the main elements in a SPAC is as follows:
- the sponsor, i.e., the main investor or investors who have set up the SPAC,
- other investors who decide to acquire shares in the SPAC but have no prior knowledge of the target company, and
- the target company, which is the going concern that will be acquired at some stage by the SPAC, and with which it will subsequently merge.
This procedure is similar to an IPO (Initial Public Offering) or the listing of a company on the stock exchange – but it does not follow the normal standard procedure. This is because the company that ends up being listed on the stock exchange is the target company that is acquired by the SPAC. This organization is already listed, and then merges with the SPAC. SPACs have been a well-known phenomenon on Wall Street since the late 1980s, yet it is only since the pandemic that they have started to gain momentum in Europe.
In 2020 and early 2021, SPACs in general enjoyed resounding success – in some markets more than others, of course. To that point, several indicators have revealed that everything that glitters is not always gold, with losses dragging down many companies acquired by SPACs. In fact, some SPACs, which have not yet acquired their target and are simply listed, have experienced major downturns in their fortunes. It is true to say that in the last quarter of 2021, the SPAC ecosystem has bounced back, but there are certain indicators that are not particularly optimistic. SPAC acquisitions are highly complex operations, and there has been a wave of litigation against them seeking damages.
So, are SPACs an attractive option with advantages worth considering, or are they a formula that was merely a flash in the pan? Indeed, SPACs – as they have been conceived and envisaged – are an attractive investment vehicle, as long as investors know what they are buying into and analyze the operation in depth. Clearly, transparency is required when it comes to disclosing information about the SPAC and its sponsors to investors.
In recent months, a number of celebrities have become SPAC sponsors, which has attracted many small investors to the floor on the back of these sponsors’ reputations. However, these high-profile backers are not enough reason to jump in without first understanding what you are getting into as an investor. As in all things, it is essential to prioritize information and advice. In addition, it would seem that high salaries and commissions are also responsible for the losses incurred in many of these vehicles. And, finally, only better regulation can provide legal certainty to the market and to the small investor and consolidate the success of this instrument.
SPACs are here to stay, although the frequency of their use will certainly plateau.
In this sense, although Europe has some experience of SPACs, such as in the Netherlands and Germany, progress has been slow in other countries. In the case of Spain, the competent authorities and the financial regulator have expressed their support for the vehicle, while at the same time calling for greater transparency and a specific regulation for it. Although, strictu sensu, this should not be necessary, it would be advisable (especially given what has happened in the US market), and there is already a proposal to amend the Spanish Companies Law, which expressly refers to a SPAC as a listed company with the purpose of acquisition.
In the light of this Spanish proposal, we can pinpoint the main concerns surrounding SPACs, which means there is a need to guarantee that the funds obtained with the SPAC’s IPO are frozen to safeguard investors, and also ensure investors have a legal right to recover their investment through a shareholders’ right of separation once the merger has been planned, or the option of redeemable shares that enable investors to leave the company. Likewise, the company may reduce capital through the redemption of its own shares, as a repayment mechanism.
Given the existing regulatory and legislative hesitation in Spain, the SPACs that have come to fruition have taken place outside our borders. This is the case, for example, of Wallbox. Wallbox, a start-up dedicated to electric car chargers, went public in New York through a SPAC. Through this operation it raised 250 million dollars to finance its business plan for the coming years, ensuring that 83 percent of the company’s capital is held by the same shareholders as before the SPAC.
SPACs are here to stay, although the frequency of their use will certainly plateau. The trend on Wall Street in recent years indicates that growth of this type of vehicle will level out but that their numerous advantages continue to make them a highly attractive proposition. One of the most important benefits is that investors can see their investment taking shape in emerging businesses, such as those related to technology and digital markets.
The stabilization of SPACs will be accompanied by corrections in many of their elements:
- transparency of the operations whereby investors are given the necessary information before participating in the SPAC
- sponsors becoming more professional with reports and studies that demonstrate their ROI in other SPACs
- legal protection strengthened by a regulation or regulations that safeguard the minority investor’s position, avoiding shareholder dilution
While there may be a decline of SPACs in the United States, they will continue to exist under certain circumstances so long as they are properly bolstered by appropriate corrections. Markets such as those in Europe are proving to be a slow burner for SPACs and can take advantage of the experience in other markets to amend legislation that will allow for success.
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