SPAC has flourished in the past two years. According to SPAC Insider, 358 SPAC companies were listed in the first half of this year, surpassing 248 in the full year of 2020.
What is a SPAC?
SPAC (Special Purpose Acquisition Company) is a “shell Company” formed by mutual funds, hedge funds and other raised funds. SPAC has no specific business but only cash. The sponsors raise funds by listing the shell company on the NASDAQ or NYSE and combining common stock and share options in the form of investment units to market investors. The funds are deposited on an escrow account. In short, SPAC is essentially a shell company without any real business. SPAC is created to find valuable unlisted companies for mergers and acquisitions.
The History of SPAC Development
In the 1990s, SPAC appeared on the Canadian Toronto Stock Exchange to acquire mining companies that still remains. It was also called CPC for short. In 1993, GKN Securities of the United States introduced it to the market and registered the trademark SPAC. SPAC was a financial instrument for companies to go public, which has become a hot market since the end of 2003.
The Subprime Mortgage Crisis in 2008 swept the world. To activate the financial markets, the SPAC listing system has been adjusted: SPAC can land directly on the NYSE or NASDAQ. Previously, SPAC shell companies could only be listed on the OTC market. After the completion of the merger, the new company meets certain standards and can directly land on the Main-Board Market. By the end of 2016, more than 140 companies in the US had been successfully listed on the US Main-Board Market. After more than 20 years of development, the SPAC listing system has become very mature. The structure of the SPAC has evolved by giving shareholders the right to buy back shares and circumventing the requirement for a full shareholder vote.
SPAC listing development in three stages
In recent years, SPAC listing has won the favor of domestic and foreign financial institutions. From its birth to its development, it has mainly gone through the following three stages:
The first stage began in 1993 when it was introduced into the US capital market by GNK Securities, using Cash Shell to raise funds in the open market. Then, it used the raised funds to carry out reverse mergers and acquisitions of high-quality enterprises, helping high-quality enterprises to achieve listing financing. The same year, GKN registered the SPAC trademark. Between 1990 and 1992, GNK completed three SPAC transactions. In 1993-1994, there were 13 SPAC companies in the market, of which 12 completed mergers and acquisitions. Throughout the 1990s, there was an unprecedented boom of Internet technology companies in the American capital market. As a result, the SPAC listing total fund raising was almost zero. Between 1995 and 2002, few SPAC companies were traded in the capital markets.
The second stage was from 2003 to 2008. Behind this was the rapid development of private equity funds (PE), hedge funds. SPAC conducted IPO and its high profits attracted a large number of investors. Since the general investor cannot participate in the first class market, they needed to seek an alternative investment pipeline, SPAC. So the demand for the SPAC model was emerging. SPAC gave investors in the public market the opportunity to obtain high returns in the primary market. As a result, SPAC was also seen as a private equity fund for IPO. From 2007 to 2008, the US capital markets peaked, representing 31% and 55% of the total IPO count in 2007 and 2008 respectively. With the financial crisis of 2008, the whole SPAC fell to a low. In the first year of the financial storm, the US capital market had only one SPAC shell company, IPO.
The third stage was from 2010, when the US financial market gradually emerged from the shadow of the Subprime Mortgage Crisis. The SPAC financing model was once again popular with capital market investors. There were a total of 329 SPAC new issues in the US capital market between 2003 and 2018. Of these, 173 SPAC companies successfully went public, raising an average of US$168 million per SPAC. Of those, 173 SPAC companies successfully went public, raising an average of US$168 million per SPAC.
(1) Time cycle is short, the shortest 3 months to complete the listing;
(2) SPAC is more suitable for small and medium-sized enterprises. It can bypass the SRC’s rigid regulations on enterprise IPO;
(3) Less fees, no need to pay underwriting fees, listing licensing fees;
(4) The success rate is high, which only requires the consent of both parties, and there is no issuance failure caused by other reasons;
(5) The financing amount is determined and the valuation and pricing of the target enterprise is fixed in advance;
(6) SPAC shell resources are clean without historical liabilities and related legal issues;
(7) Most of the investors are hedge funds, mutual funds and other institutional investors with a good market image and a large space for growth.
SPAC listing process
SPAC management set up SPAC Corporation;
SPAC management makes the issuance application documents;
SPAC shows for investors;
SPAC is traded on NASDAQ or NYSE (IPO);
SPAC management needs to find target companies and complete acquisitions within 21 months;
SPAC management due diligence on target businesses;
Both merger and acquisition parties determine the merger plan;
show to shareholders;
SPAC shareholders’ meeting voting approval;
The new listed company is merged and changed its name and the new company was officially listed on the US Main-Board Market;
New listed companies trade on the Main-Board Market and obtain secondary financing;
The whole listing process after finding the target enterprise generally only 6-8 months and can be completed in 3 months as soon as possible.
It is worth noting that after raising the funds, SPAC sponsors need to deposit the funds in third-party commercial banks and then find suitable M & A enterprises within the specified time, generally within 18 to 24 months. This stipulated time can be extended under certain conditions. Near 24 months, SPAC sponsors can initiate an extension vote to all shareholders. If more than 50% of the shares vote for the extension, the extension can be smoothly extended. A single vote can be postponed for up to three months, and a maximum of four postponements can be initiated. But most of the sponsors will donate to SPAC along with the deferred vote as a benefit to entice investors not to redeem their shares.
What business is SPAC suitable for?
Nature of enterprise: Private;
Industry: IT, consumer electronics, new materials and energy, biotechnology, or other featured industries;
Enterprise position: segmented industry leader, high growth, high market share;
Profit requirements: net profit greater than RMB40 million per year (profit is non-rigid requirements, mainly assessed by the market value of the company);
Law: enterprises legally paying tax and operating legally;
Other requirements: No intellectual property issues;
In March 2004, Beijing origin seed technology Inc. was listed on OTCBB through American company Chardan. In November 2005, Beijing origin seed technology Inc and Chardan completed a merger, obtaining US$24 million financing and simultaneously traded on NASDAQ; In January 2006, Beijing origin seed technology Inc raised US$40m by issuing warrants, and its original investors including hedge funds returned 700%.
Jia yueting’s Faraday Future announced a merger with Property Solutions Acquisition Corp(PSAC) on January 28 and listed on NASDAQ on July 22. US$1 billion was got.
VIYI Algorithm will merge with VENUS through SPAC. In the deal, VIYI algorithm are valued at US$400 million. After the transaction, the merged subject will be named MicroAlgo Inc., the deal is expected to close in the fourth quarter of this year.
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