Special Purpose Acquisition Company (SPAC)
The world was introduced to two major things, one being life-taking, and the other being life-changing, while the former is COVID-19 and the latter is SPAC – Special Purpose Acquisition Company. While the world was experiencing pandemic, the financial markets experienced explosive growth in the deranged economy.
In the year 2020, a total number of 248 SPAC’s raised a record of USD 83 billion through their IPO’s. The figure has definitely escalated in the year 2021 with a massive USD 73.2 billion already raised by 228 SPAC’s within the first three months itself.
1. What is SPAC?
SPAC is basically a publicly traded company with nil operations or assets; it merely exists for the purpose of merging with a target operating company.
SPACs are a propitious option to raise public funding from off-shore markets herein, the vehicles are utilised by those companies who are involved in generating investments through public offering for the sole purpose of buying a private company.
SPACs are also called blank check companies as they neither hold any assets nor consist of an operational business.
SPAC isn’t a new concept, but of lately it has become the most preferred way for experienced management teams and sponsors to take companies public.
It offers a rather non- conventional and non-conservative approach, which can prove as a boon to the drying private markets.
2. Evolution of SPAC
SPACs of the old generation to SPACs of the new generation have evolved a lot in past decades, and there are specific factors which have contributed in the same. The structure of old generation of SPAC faced lack of regulatory oversight and fraudulent activity.
These finally paved a way to reformation and transformation of SPACs and its efficiency of working as a vehicle and contributing in boosting the financial sector. SAPCs were not very common and were rarely used as investment product, compared to the present especially during the Pandemic.
The High profit companies like Virgin Galactic by Richard Branson chose SPAC to raise its capital rather than choosing traditional and conventional IPOs. There also has been increase of interest from the management teams and financial sponsors with experience in private equity.
Apart from these factors SPACs have also evolved because of the proportion of overall IPO market they represent, which is recorded as high.
3. How does SPAC work?
SPAC majorly works through Initial Public Offering, and it has to abide by the time frame of 2 years to complete an acquisition. Through an IPO of SPAC, the money raised is primarily from institutional investors and retail investors.
The cash that is raised is placed in a trust account and is held till the SPAC completes a business combination. This combination is usually in the form of mergers, where the SPAC hunts and acquires a private company.
When the SPAC is going public, it consists of common share and sometimes a fraction of a warrant. By its nature, common shares have certain rights attached to it. One of such rights is the right to redeem.
Through this the investors can decide if they support the proposed acquisition of the target company by SPAC. If the investors feel otherwise, they can redeem these shares and exit the deal.
The fraction of warrant is the amount which is to be paid to the investors for holding their money in the SPAC until the target company is acquired. It is like an interest on the amount of money invested.
4. Trend of SPAC in India
This Covid-19 has has seen a surge in the interest of foreign investors to opt for the SPAC route. The sectors which are becoming hot favourites being renewables, tech or e-commerce. Further, SPAC is more preferred where the corporate structure enables it to be merged quite easily.
As per Nomura, as many as 10 Indian companies could go public through SPAC deals before the end of the year.There can be more participation from equity capital market, financing and merger and acquisitions in the times to come.
We shall be covering on various aspects of SPAC in series of forthcoming 5 articles.
For any feedback or query, feel free to connect with mumbai@amlegals.com
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