SPACs: Why Start-ups Should Be Serious About Them 

06 September 2021 Projectus Consulting

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While there may be a euphoria about SPACs in the USA, success stories in Europe are still hard to come by. Scepticism is spreading quickly, although the SPAC model has existed for years, and market conditions have shifted more toward security. 

 

SPACs briefly explained: 

(S)pecial (P)urpose (A)question (C)ompanies are shell companies that are set up solely to collect investor money when they go public. Usually, the SPAC sponsors are industry experts within the private equity sector. They use funds to collect and invest in large high-growth companies. Instead of traditional stocks, they offer units. These units are made up of one share and one warrant component. SPAC sponsors usually have a 12-24 time period to identify a target. If they fail to go this all investors get their investments back. As soon as a target has been selected the merger process begins: Due diligence, negotiations, and the signing of the takeover agreement. The final step is the de-SPACing process, in which the sponsors coordinate the transaction with the end investors at a general meeting. If at a general meeting there is a pre-defined majority for approval and regulatory requirements are met, the takeover will take place. Any investors who do not agree may withdraw and get their money back. Upon transaction completion, the target company will be listed, and the ticker symbol will be adapted to the company name. The advantages of this include the experience of the SPAC management team, the security of financing or growth capital and, finally, access to institutional investors. The exact regulatory criteria depend on the exchange on which the SPAC is listed. Over 95% of the globally active SPACs are listed in the USA, but over 90% of these can also invest in European targets. 

 

SPACs as IPO light? 

With SPAC-IPOs, three-digit million amounts are typically collected. The rule here is: “The bigger the better”. The SPAC sponsors usually receive a share of 20% (now often less) of the collected capital and the warrants if the deal is successful. SPACs were originally meant to bring smaller companies that avoided the expense of an IPO of their own. However, in the meantime, many large PE investors have placed their own SPACs. SPSACs. Therefore, represent a real financing alternative to IPOs, late-stage growth equity and PE deals – especially for larger, highly ambitious companies that often come from the tech sector. A lengthy complicated IPO process can be avoided this way. Company founders and important stakeholders still maintain their influence, because these former shareholders/stakeholders of the target companies take over large shares in the form of rollover equity as part of the merger. After the de-SPACing process (after the completion of the merger/takeover), the SPAC sponsors finally largely withdraw operationally and are not involved in the company's management or board of directors. The day-to-day business of the newly merged and listed company is managed by the management of the original target. The SPAC sponsors provide advice with their experience and know-how, for example on the supervisory board. After the de-SPACing process (after the completion of the merger/takeover), the SPAC sponsors finally largely withdraw operationally and are not involved in the company's management or board of directors. The day-to-day business of the newly merged and listed company is managed by the management of the original target. The SPAC sponsors provide advice with their experience and know-how. For example, on the supervisory board. After the de-SPACing process (after the completion of the merger/takeover), the SPAC sponsors finally largely withdraw operationally and are not involved in the company's management or board of directors. The day-to-day business of the newly merged and listed company is managed by the management of the original target. The SPAC sponsors provide advice with their experience and know-how, for example on the supervisory board.  

 

Nevertheless, companies should prepare thoroughly in advance. In the following, we provide a few tips and questions that can help start-ups to decide whether a SPAC is currently the right financing model for them and whether the respective SPAC suits them.  

 
SPAC euphoria in the USA, scepticism in Europe 

While there is a certain euphoria about SPACs in the USA, concrete success stories are still rare in Europe. There is widespread scepticism, although the SPAC model has existed for many years and market conditions have shifted in the direction of more security for investors. Inexperienced investors recently made headlines for investing in an “exciting story” instead of a carefully screened target company, driving the price up. These are inglorious exceptions that rightly call the supervisory authorities to the scene. If all parties involved use the intended security mechanisms and offer a high level of transparency, we see a high probability. 

 

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