Special Purpose Acquisition Company: change in IPO'S

FEON WONG | LEGAL JARGON WRITER Due to the market volatility brought by the pandemic, Special Purpose Acquisition Company (SPAC) is increasingly being used as an alternative way for private companies to go public. In 2020, SPAC represents 40% of the IPO volume, raising a total of $31.6 billion as compared to last year’s $12.4 billion. Essentially, the concept of SPAC encompasses companies that raised capital with no business plan, aiming to acquire private company as an investment in two years’ time. If the time exceeds two years, the company will be liquidated with investors getting back their money. Investors do not normally know which private company will be acquired beforehand. Nor do they have a say in the deal itself. However, the investors have a redemption right which enables them to take back the money invested if they are against the deal. This would allow them to claim back $10 per share - the same amount they receive if the SPAC was liquidated. Recently, the Securities and Exchange Commission (SEC) has decided to review on the promote share. It is a premium share that the sponsors can purchase after they prompted the deal, allowing them to acquire up to 20% of the SPAC’s stock at a typical nominal fee of $25,000. In addition to the shares, sponsors normally receive warrants; once exercised, it will enable them to acquire around 25% of shares in the company. However, there is a deal recently that departs from the traditional SPAC – The Tontine Holding Group. The SPAC structure is of novel approach: the tontine warrants are exercisable at the price of $24.00, as compared to the typical $10.00, while the entitlement of promote shares are forgone. The sponsors also proposed to only claim for the warrants after 3 years of operation, with a prerequisite of 20% increase in the share price. In an attempt to attract long-term investments, the sponsors had offered warrants as incentives to the investors if they did not exercise their redemption rights post acquisition between two companies. This will, in turn, promote certainty for the business combination. In terms of the term that benefits the sponsors, both parties reached an agreement that the warrants are exercisable for 10 years instead of 5. Considering the 3-years-no-tranfer warrants, the timeline is said to be fair and acceptable. The efforts were proven to be a successful one as it allowed the sponsors to raise $5 billion, the largest SPAC ever. Whether SEC’s action may deter companies wishing to go public in a time-saving way remains unknown. What is known is whenever there is a threat, there will be ways to go around it. It is, therefore, intriguing to see whether the traditional IPO route will be favoured by many after the pandemic fare. FEON WONG LLB student at The London School of Economics | Communication Officer at Japan Society at LSE. 👨‍💻Want to share feedback? Did we miss something important? Let us know! We would love to hear from you at info@legaljargon.net or simply just comment below!

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