Special Purpose Acquisition Companies (SPAC)SPAC for New Businesses and Startups

April 9, 20210

SPAC for New Businesses and Startups

A high public market valuation has led to several IPOs. For small businesses, SPAC can be an effective tool to raise funds early in an efficient manner.

The small business is not required to incur costs which are related to marketing of the IPO. The operation of the target company and related business will have to be marketed by SPAC, as the amount being raised is by them.

Usually, IPOs of small companies do not attract a solid backing of equity investors. Investors in SPAC make an investment decision based on the reputation of the sponsor and what is the object behind such merger. This reputation plays its role when the transaction takes place.

Once, a small company is gone public the trust and confidence of initial investors enhances with the company irrespective of the size of the company.

For start-ups, this process of raising cash through the Public medium can be thought of as Merger and Acquisition transaction and not an IPO.

This is because the underwriters of a SPAC are the sponsors of the acquiring company, and once the transaction is completed everyone falls back in the same team.

This would mean that the reputation of sponsors is at stake when they are certain about a certain target company. For a startup, this would result in a fair valuation of the company.

Indian Companies and SPAC

It is noteworthy that Venture capitalist launched SPAC to help Indian start- ups with US listing, wherein VC’s investors from elevation capital and think investments would jointly launch the SPAC.

SPACs on the other hand are highly preferable for start -ups as it launches an IPO within specific investment criteria and merges or acquires companies that fit those criteria’s, this also allows start -ups to skip normal IPO procedures for listings. Start – ups like Flipkart and Grofers are willing to utilise the option to get listed in the US.

Renew Power India’s biggest renewable power producer decided to go public in the US through a merger with SPAC at a valuation of around $8 billion. Goldman Sachs backed renew where in it entered into a merger agreement with RMG Acquisition Corporation II and the combined entity would be publicly listed on the Nasdaq, an American Stock Exchange.

Similarly, Yatra Online Inc., which is a parent company of Yatra India, got a chance to list on Nasdaq. The SPAC in this case was another American company Terrapin 3 Acquisition.

Due to the progress of emerging economies such as India, SPAC method of raising cash is resurfacing in India. The Indian entities will take benefit of such transaction only if they can do the same with potential targets outside.

For any feedback or query, feel free to connect with mumbai@amlegals.com

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