What is a SPAC? The basics, when you are contemplating going public in 2022

2021 was a record year for initial public offerings (IPOs) of special purpose acquisition companies (SPACs), as more than 613 SPACs completed their IPOs in the United States, raising more than US$162 billion, compared to 248 SPAC IPOs raising US$83.4 billion in 2020. SPACs represented 61% of all IPOs on US-listed exchanges in 2021.

SPAC activity sky-rocketed in the first quarter of 2021, with 298 SPAC IPOs raising around US$87.9 billion, losing steam in the second and third quarters of 2021. SPACs rebounded in the fourth quarter of 2021, as they evolved to address some of the market and regulatory issues we describe below.

Furthermore, during 2021, several LatAm-focused SPACs emerged, taking various companies public, including in the technology, urban air mobility, satellite, pharmaceutical, data software and gaming markets, in Latin American jurisdictions such as Brazil, Mexico, Colombia and Argentina.

What is a SPAC?

A SPAC is an investment vehicle/shell company organized by one or more sponsors to raise capital from the public in an IPO, for the purpose of finding one or more private operating companies to engage in a business combination (a de-SPAC transaction). As a result of a de-SPAC transaction, the target company will become public.

SPAC IPOs are typically structured as offerings of units comprised of shares and fractional warrants.  All proceeds from the SPAC’s IPO are deposited into a trust account. Most SPACs are required to complete a de-SPAC transaction within a specified timeframe; as of late 2021, usually from 15 to 18 months after the SPAC’s IPO.

If the SPAC fails to find a suitable target and complete its de-SPAC transaction within the required timeframe (including any extensions), it must redeem the public shares sold in its IPO for each shareholder’s pro rata share of the IPO funds held in the trust account, and all of the SPAC’s warrants will expire worthless. Also, SPAC investors have the right to have their shares redeemed in connection with an initial business combination.

SPAC goodies

A target company going public through a de-SPAC transaction instead of a traditional IPO may benefit from better pricing certainty, as negotiations are conducted directly with the SPAC sponsors and not based on potentially volatile market conditions (although market conditions can affect the number of redemptions and the company’s valuation following the de-SPAC transaction).

Assuming limited redemptions, a de-SPAC transaction can offer a significant amount of cash to fuel the target’s growth or allow sellers to exit. Most notably, a de-SPAC transaction can generally be executed more quickly than most traditional IPOs.

US regulatory developments

During 2021, the US Securities and Exchange Commission (the SEC) raised concerns related to, among others, (i) certain disclosure practices followed by SPACs, including with respect to conflicts of interests and projections (and the liability risk associated therewith),[1] and (ii) the accounting treatment of SPAC warrants.[2] De-SPAC transactions have also given rise to notable SEC investigations[3], federal securities laws class actions and breach of fiduciary duty litigation.[4] These developments contributed to curbing the frenzy experienced in the first quarter of 2021. In 2022, the SEC proposed new rules[5] could significantly increase the regulatory burden on SPACs, including by expanding the scope of disclosure and liability applicable to de-SPAC transactions.

The SPAC market remains healthy, including for Latin American companies

Despite the various market and regulatory challenges, we expect that the market for de-SPAC transactions will remain active during 2022.  As of December 31, 2021, approximately 580 SPACs were searching for acquisition targets, with more than 150 of those facing deadlines to complete their de-SPAC transactions in 2022.

Latin American companies seeking to raise capital internationally should continue to monitor the SPAC market to assess whether it provides an attractive opportunity for them to become publicly traded in the United States.

At DLA Piper, we have vast experience advising SPACs, target companies, sponsors, investors and financial institutions during all phases of the SPAC lifecycle. If you have any questions on any of the above matters or would like to discuss a potential SPAC issue or investment, please do not hesitate to contact any of the authors.

[1] See, “Special Purpose Acquisition Companies” published by the Division of Corporation Finance, Securities and Exchange Commission (CF Disclosure Guidance: Topic No. 11) (available at: https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies) and “Statement by Acting Director Coates on SPACs, IPOs and Liability Risk under the Securities Laws” posted by John C. Coates, U.S. Securities & Exchange Commission, on Friday, April 9, 2021 (available at: https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws).

[2] See, SEC Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), published on April 12, 2021 (available at: https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs).

[3] See, e.g., “SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination” (available at: https://www.sec.gov/news/press-release/2021-124) and “Nikola Corporation to Pay $125 Million to Resolve Fraud Charges” (available at: https://www.sec.gov/news/press-release/2021-267).

[4] See, “MultiPlan decision focuses scrutiny on SPAC merger disclosures” (available at: https://www.dlapiper.com/en/us/insights/publications/2022/1/multiplan-decision/).

[5] See, SEC Release Nos. 33-11048; 34-94546; IC-34549; File No. S7-13-22 (Special Purpose Acquisition Companies, Shell Companies, and Projections) (available at: https://www.sec.gov/rules/proposed/2022/33-11048.pdf.)