The special purpose acquisition company (SPAC) market in the United States had an unprecedented year in 2020. More than $83 billion was raised in 248 initial public offerings SPACs, more than all previous years combined. The SPAC IPO market accounted for over half of all IPO’s in the U.S. in 2020. SPACs have been around for a number of years, known as “blank check companies.” Sponsors have used them to raise capital in an expeditious IPO based on the strength of a high-profile and well-regarded management team in a particular industry. SPACs have been used to raise capital to buy cannabis businesses, sports teams, electric vehicle manufacturers, education companies, fintech businesses, biotech and health care companies, as well as oil and gas, packaging, and manufacturing businesses. Proceeds from a SPAC IPO are typically placed into a trust account and must be used to buy a business, by way of a reverse merger, generally within two years (the SPAC trust can only invest in safe, interest-bearing instruments). If the shareholders of a SPAC do not approve of the proposed merger, or the SPAC term expires, then the IPO capital must be handed back to the investors. Initial investors in a SPAC are typically issued warrants to incentivize them to subscribe for IPO shares and to vote in favor of the proposed merger. Sponsors of a SPAC are issued founders’ shares, typically equal to 20% of the value of the SPAC, which stake-holding becomes diluted post-merger.
Private equity firms have discovered that the SPAC market is an expedient method to raise capital, or “assets under management,” from a new class of retail investors, with generous private equity-like economics. At-risk capital is limited to filing fees, professional fees, as well as half the underwriting commissions for the SPAC IPO —the other half of those commissions are typically paid if and when the SPAC consummates a successful merger. A SPAC is a much quicker way to go public than a traditional IPO, providing greater deal and pricing certainty in a volatile capital market. The SPAC IPO market in 2020 has undoubtedly benefitted from robust activity in the stock markets, generally, with Wall Street exchanges reaching historic highs in 2020.
The pandemic also lifted the SPAC IPO market, as a blank check company is a shell with no need to conduct an extensive in-person road show. Until the last few years, and 2020 in particular, many investors and sponsors viewed SPACs with skepticism. In years past, hedge funds and other big institutional traders would buy shares with warrants in a SPAC IPO as a safe arbitrage play. Over the last few years, however, structuring techniques have been employed by SPACs to defeat the hedge fund arbitrage play, including adopting restrictions on the percentage of shares that may be redeemed from a stockholder or group (called “bulldog provisions”) or increasing shareholder voting thresholds, limiting the ability of hedge fund players to vote down a proposed merger. The continued evolution of SPAC structures, the growing percentage of SPACs that have successfully consummated their mergers, and the broadening investor class interested in SPACs have led to the growing institutionalization of SPAC capital as a legitimate source of capital on Wall Street. Momentum in the market has been building since 2019 saw popular companies like DraftKings Inc. and Richard Branson’s space company, Virgin Galactic Holdings Inc. go public through sales to blank check companies. The economic volatility and distinct price decline have made IPOs and direct listings impractical options for many private companies which has certainly brought the spotlight to SPACs as a way for private companies to gain access to public markets.