By: George Khalife, Vice President Capital Formation - Midwest, TMX Group
By now, it’s likely that you’ve come across an article or headline with the word “SPAC” in it. From Bill Ackman, the American investor and hedge fund manager, who launched a $4 billion “blank check” company, to the owner of the Golden State Warriors, Chamath Palihapitiya, who just filed three new SPAC vehicles with the SEC in September of this year (TechCrunch).
SPAC financings have recently experienced a resurgence over the past few years. To give you a glimpse of their popularity, there were 59 SPAC IPOs in 2019 raising a total of US$13.6 billion. Year to date, 2020, there have been 178 SPAC IPOs that raised an average of $365 million per SPAC for a record total of US$65 billion (according to spacresearch.com).
Why are they suddenly popping up again in the U.S.?
Given protection measures like the Sarbanes Oxley Act, it has been more difficult for companies to go public via a more traditional route such as an IPO. In addition, here are some examples of why SPACs could be a good alternative financing option for companies according to Echelon Wealth Partners:
- The timeline to go public via a SPAC is typically quicker i.e. 3-4 months vs. a 6-9 month timeline via an IPO
- Reporting requirements are more flexible for management teams and, in the U.S., the SEC review process can be deferred until after the acquisition of a target company
- The direct and indirect expenses/costs associated with a SPAC tend to be lower than those incurred via the traditional listing process
A Different Story In Canada
If we take a look up north, the Canadian markets have been more reserved in the space and situationally active. The first SPACs to list in Canada were in 2015 and since then, there were ten that went public which collectively raised ~ C$2.24 billion. Launching successful SPACs isn’t an easy feat;
- They often compete against large hedge funds or pension plans with deep pockets
- SPAC investors don’t always align on the investments proposed
- There are costs associated with not closing a deal
TSX SPAC 101
But what exactly are SPACs, how are they formed, and what does the process look like? In this POV, we try to simplify the answers to (hopefully) some of the burning questions you may have around this hot space.
Below, you’ll find a breakdown of the process / requirements that come with launching a SPAC on TSX.
What does the acronym stand for?
Get ready for a tongue twister; Special Purpose Acquisition Corporation.
What exactly is a SPAC?
A SPAC is a company that has no commercial operations which is formed solely for the purpose of raising capital through an initial public offering (or IPO) to acquire an existing company with actual operations. That’s why they’re known as “blank check companies”.
It also gives the opportunity for individuals unable to buy into hedge funds or private equity funds the ability to participate in the acquisition of private companies traditionally targeted by those firms.
What’s the difference between an IPO and a SPAC?
The difference between an IPO and the SPAC program is that SPACs allow directors or officers to form a corporation that contains no commercial operations or assets other than cash.
How does someone publicly list a SPAC?
There’s a roadshow that takes place between institutional investors (like hedge funds) and the management team of the SPAC to gauge interest in the offering. The SPAC is then listed on the Exchange via an IPO, raising a minimum of $30 million. 90% of the funds raised are placed in escrow (a hold account), and must then be used toward the acquisition of an operating company.
How large can the target company be in size?
There’s no maximum size of a target company. However, the target company (or qualifying transaction) has to be at least 80% of the value of funds held in escrow.
How long does a SPAC have to complete the process?
SPAC founders have up to three years to identify an appropriate business/asset as its target company. If the timeline isn’t met, the money goes back to shareholders.
Can you break down the actual process?
Step 1) Creating the SPAC
- A group of individuals with senior-management level business and public company experience incorporate the shell company (or SPAC)
- Founders of the SPAC put up a small amount of seed capital and prepare the prospectus document, which is then filed with the securities regulator
Step 2) Selling the shares
- The prospectus outlines the intention to raise a minimum of $30 million by selling shares of the SPAC
- At least 1 million shares are to be held by 300 public shareholders
- Once the shares are distributed, the SPAC securities are listed for trading
- Immediately after listing, the SPAC puts at least 90% of the gross processed raised from the IPO into escrow
Step 3) Completing the acquisition
- SPAC founders must identify the qualifying acquisition within 36 months
- The target company has to be at least 80% of the value of funds in escrow
- The SPAC files a document called information circular which has all of the details about the target company
- A majority of the public holders of the SPAC have to approve the transaction before it goes through
- Once the acquisition is approved and the business/asset is acquired, the resulting entity will trade a TSX-listed company
Any examples of recent SPACs in Canada?
1) Bespoke Capital Acquisition Corp. is a US$360 million special purpose acquisition corp. listed on TSX pursuing a legalized cannabis focused investment strategy. To date, Bespoke has raised ~ $465M (as at July 31, 2020).
2) NextPoint Acquisition Corp. is a newly organized special purpose acquisition corporation listed on TSX with a focus on the financial services industry. NextPoint has a market cap of ~ $199M USD and has raised $267M USD to date, as at July 31, 2020.
Hopefully this short article provides you with a good overview of what SPACs are and some of the general details that come with it. If you want to dive deeper into the weeds, feel free to check out THIS link. Although SPACs are certainly an interesting backdrop to explore, it is always recommended to conduct thorough research.
--This article was co-authored by:
George Khalife, Vice President, U.S. Capital Formation (Midwest U.S.)
David Chelich, Sector Head, Business Development, Global Energy & Diversified Industries
For more information on the TSX and TSX Venture Exchange, please visit https://www.tsx.com or contact TMX's MAPLE member contact, Delilah Panio, VP U.S. Capital Formation at delilah.panio@tmx.com.
Note: All numbers are quoted in U.S. dollars unless otherwise stated.
This article is provided for information purposes only. This article is not an endorsement or recommendation of any securities or industry referenced herein. The content of this article does not constitute a solicitation or recommendation. US persons may not access the Canadian markets directly, and any questions about or interest in investing in the Canadian markets should be directed to a US broker. Neither listing on TSX nor TSX Venture Exchange guarantees the future performance of a security or an issuer. The information in this article contains historical information, and such historical information may not be indicative of future events. TMX Group Limited and its affiliated companies do not represent, warrant or guarantee the accuracy or the completeness of the information in this article. This article does not, nor should it be construed as, providing any trading, legal, accounting, tax, investment, business, financial or other advice, and you should not rely on it for such purposes. This article is not a substitute for professional advice and professional advisors should be consulted.