Capital Structure of SPAC
Capital Structure of SPAC is mainly divided into three units. The units are as under:
- Public Unit
The Capital Structure of SPAC is sourced from retail and institutional investors and 100% of the money raised in the IPO is held in trust account. And in return of the capital, investors get to own units , with each until comprising a share of common stock and a warrant to purchase more stock at a later date.
What usually occurs is that after IPO, the units become separable into shares of common stocks and warrants, which can be traded in the public market. The sole purpose is to provide investors with additional compensation for investing in SPAC.
- Founder Shares
Founder shares are purchased by the founder at the onset of the SPAC registration and pay nominal consideration for the member of shares that result in a 20% ownership stake in the outstanding shares after the completion of the IPO. The shares are intended to compensate the management team who are not allowed to receive any salary or commission from the company until an acquisition transaction is completed.
The units that are sold to public comprises of a fraction of a warrant, which gives the investors an opportunity to purchase the whole share of common stock. Depending on the bank issuing the IPO and the size of the SPAC, one warrant may be exercisable for a fraction of a share or a full share of stock.
In order to receive a full share of a stock the investor must pay the full cost of the warrant as public warrants are cash settled.
SPAC & Reverse Mergers
A private company purchases a shell company that has no current operation and fewer assets, but is publically traded in a reverse merger. A reverse merger issue is responsible for a significant portion of PIPE Securities.
When two companies merge with the shell company they become the serving entity as a result of which the privately held company then becomes a public trading entity going public through a reverse merger which does not become a less attractive investment than others, but often have a weaker market liquidity.
SPAC are similar to company that use reverse mergers. But the major difference is that SPAC comes with significant management groups. SPAC also provides significant amount of cash for the business combination by raising money for acquisitions in its initial public offering.