The Return of the SPAC
From a capital markets perspective, 2020 has been defined by some as “The Year of the SPAC.”1 A special purpose acquisition company (“SPAC”) is a company with no operating business that is created to raise capital in an initial public offering (“IPO”) with the purpose of using the proceeds to acquire a target business or asset to be identified following the completion of the IPO. A SPAC is also referred to as a “blank cheque” company as investors have limited or no visibility of the acquisition target at the time of the IPO. While such vehicles have been used for several decades, Canadian and U.S. markets have witnessed a resurgence in their popularity in recent years, with high-profile deals led by Chamath Palihapitiya (Virgin Galactic) and Bill Ackman (Square Tontine Holdings, Ltd.) to name just a few. To date in 2020, 141 SPACs have gone public to raise $54.4 billion, eclipsing the 59 SPAC IPOs that raised $13.6 billion in 2019.2 Increasingly, private companies have sought to forego the traditional IPO route to complete their go-public transactions as the SPAC route is thought by some to be more time efficient, cost-effective and less risky. This bulletin describes the anatomy of a SPAC in a Canadian regulatory context.
Launching the SPAC
The first step in creating a SPAC involves a founder group (the “Sponsor”) incorporating a company with no commercial operations or assets, except for cash. Typically, the Sponsor is comprised of individuals with a deal track record and breadth of experience in finance and public company stewardship, as it will be responsible for overseeing the completion of the SPAC’s IPO and the subsequent qualifying acquisition of a target business or asset (the “Qualifying Acquisition”). Through its minimum seed capital investment, the Sponsor will cover a portion of the expenses associated with completing the SPAC’s IPO. It should be noted that under applicable Canadian stock exchange rules, the Sponsor’s aggregate equity ownership cannot be more than 20% of the SPAC immediately following the IPO. The second step involves the filing of a long-form prospectus with the applicable securities regulatory authorities and applying for a listing on a stock exchange. It is important to note that the prospectus shall include a statement that as of the date of filing, the SPAC has not entered into a written or oral binding acquisition agreement with respect to a potential Qualifying Acquisition (although a SPAC may be in the process of reviewing a Qualifying Acquisition and enter into a non-binding letter of intent). If the SPAC has identified a target business sector or geographic area in which to make a Qualifying Acquisition, the prospectus must state this as well.
In Canada, the two stock exchanges on which a SPAC will typically list its securities are the NEO Exchange (“NEO”) and the Toronto Stock Exchange (“TSX”), both of which impose certain threshold requirements. In order to list on either exchange, a SPAC must raise a minimum of $30M in proceeds under its IPO through the issuance of either common shares or units (comprised of shares and warrants). Upon completion of the IPO, 90% of the proceeds (including a minimum of 50% of any commissions owed to participating investment dealers) are placed in escrow for the purpose of funding the SPAC’s Qualifying Acquisition, which must ultimately be completed within 36 months of the IPO (or less if the SPAC’s prospectus indicates otherwise). If the Qualifying Acquisition is not consummated within such time frame, the escrowed proceeds must be returned to investors (other than the Sponsor) and the SPAC’s securities will be delisted from the exchange.
Completing a Qualifying Acquisition
Once the SPAC is listed on a stock exchange, the Sponsor will focus on identifying and completing one or more Qualifying Acquisitions. The fair market value of the SPAC’s Qualifying Acquisition must have a minimum value equal to 80% of the escrowed funds.
Following the announcement of signing a definitive agreement to complete a Qualifying Acquisition, the SPAC is typically required to obtain approval from a majority of directors unrelated to the Qualifying Acquisition and a majority of the votes cast by shareholders of the SPAC at a meeting duly called for that purpose. However, shareholder approval is not required where the SPAC has placed in escrow 100% of the gross proceeds of its IPO, including proceeds raised in any subsequent financings.
If the Qualifying Acquisition is subject to shareholder approval, the SPAC must prepare, and pre-clear with the applicable exchange, a management information circular for shareholders, including prospectus-level disclosure of the resulting issuer following the completion of the Qualifying Acquisition. The SPAC must also prepare and file a prospectus with the securities regulatory authorities prior to mailing the information circular.
If the Qualifying Acquisition is not subject to shareholder approval, the SPAC must still prepare and file a prospectus containing disclosure about the resulting issuer. However, the SPAC must also: (i) mail a notice of redemption to shareholders and make its final prospectus publicly available at least 21 days prior to the deadline for redemption; and (ii) send by prepaid mail or otherwise deliver the prospectus to shareholders no later than midnight (Toronto time) on the second business day prior to the deadline for redemption, which delivery may be effected electronically in compliance with National Policy 11-201 – Electronic Delivery of Document. The redemption mechanism permits shareholders (other than the Sponsor) to elect, in the event a Qualifying Acquisition is completed, that each share held be redeemed by the SPAC for an amount at least equal to the aggregate amount of the escrowed funds divided by the aggregate number of shares then outstanding (other than shares held by the Sponsor). Notwithstanding the foregoing, the SPAC may establish a limit as to the maximum number of shares with respect to which a shareholder may exercise a redemption right provided that such limit: (i) may not be set at lower than 15% of the shares sold in the IPO; and (ii) that it is disclosed in the prospectus. Any redemption limit established by a SPAC must apply equally to all shareholders entitled to a redemption right.
After completion of the Qualifying Acquisition, the resulting issuer will be subject to all continued listing requirements of the applicable stock exchange on which its securities are then listed.
Benefits of a SPAC
The use of a SPAC is advantageous to both a prospective investor and a private company seeking to go public. From an investor’s perspective, a SPAC can be beneficial for the following reasons:
- it provides a retail investor with an opportunity to invest in a company or sector typically targeted by hedge and private equity funds;
- the escrow requirements afford the investor a strong degree of downside protection as they are entitled to their proceeds in the event a Qualifying Acquisition is not consummated within the required time frame; and
- an investor usually has the ability to vote in favour of, or against, any Qualifying Acquisition. If they so desire, an investor can opt out by exercising their redemption right.
From a private company’s perspective, a SPAC can be beneficial for the following reasons:
- it offers a widely-held shareholder base;
- it already has cash on the balance sheet;
- it has no unforeseen liabilities since there is no history of commercial operations;
- it offers a streamlined path to a stock exchange listing without market or pricing risks;
- it is typically more cost-effective and faster than the traditional IPO route; and
- the Sponsor can provide expertise to the existing management team.
1 Linnane, Ciara. “2020 is the year of the SPAC - yet traditional IPOs offer better returns, report finds,” (16 September 2020), online: MarketWatch https://www.marketwatch.com/story/2020-is-the-year-of-the-spac-yet-traditional-ipos-offer-better-returns-report-finds-2020-09-04.
2 “SPAC IPO Transactions Statistics - by SPACInsider,” (15 October 2020), online: SPACInsider https://spacinsider.com/stats/.