These warrants, which are referred to as the private placement warrants, have terms that are substantially identical to the warrants issued in the IPO, and are commonly purchased by the sponsor at around $1.00 or $1.50 per whole warrant in a private placement that closes concurrently with the closing of the IPO. SPAC represents and warrants to Company Holder that this Agreement is in substantially the same form and substance (including with respect to the types and percentage of holdings of securities subject to this Agreement, the time periods for the transfer restrictions, and carve-outs from the transfer restrictions, which shall in each case be The public warrants are designed to be cash settledmeaning the investors have to deliver $11.50 per warrant in cash in exchange for a share of stock. In advance of signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (PIPE) commitment, to finance a portion of the purchase price for the business combination and thereafter publicly announce both the acquisition agreement and the committed financing. To this end, most SPAC IPO prospectuses contain disclosure that says that the SPAC will only complete [a] business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires an interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940. Occasionally, readers of SPAC IPO prospectuses interpret this as a maximum size for a target business of two times the size of the SPAC. The answer is provided below. The sponsor manages the IPO process, including the selection of the lead underwriters to conduct the IPO, the auditors for the SPAC and counsel to prepare and file the Form S-1 registration statement with the SEC. As a result, the SEC comments are usually few and not particularly cumbersome. Finally, SPACs typically enter into agreements with their directors and officers to provide them with contractual indemnification in addition to the indemnification provided for in the charter. If no De-SPAC transaction occurs, the deferred 3.5% discount is never paid to the underwriters and is used with the rest of the trust account balance to redeem the public shares. That acquisition or combination is known as the initial business combination . The sponsor receives a percentage of shares at the time of the offering normally 20% which are put in escrow pending consummation of a potential acquisition within a two-year period. (See KL Alert: SEC Provides Disclosure Guidance on SPAC IPO and Subsequent Business Combination Transactions (January 6, 2021).). Accounting Considerations for SPACs | BDO Knows SPACs | BDO The warrant agreement also contains an obligation for the SPAC to register the issuance of public shares upon exercise of the public warrants. They do, however, disclose the industry or geographic focus of the target business(es) they will pursue and the experience of their management in the relevant industry. Such a business structure allows investors to contribute money towards a fund, which is then used to acquire one or more unspecified businesses to be identified after the IPO. In the current market environment, SPAC sponsorship represents an unprecedented opportunity for a qualified sponsor team to access capital and engage in the acquisition of established companies in the sector or sectors in which the sponsor team has expertise and experience. Important Tax Issues When Navigating a SPAC Transaction SPAC charters provide for the establishment of the public shares and founder shares, including the anti-dilution adjustment to the conversion ratio for the founder shares. In its IPO, the SPAC offers units, with each unit comprising one share of common stock, typically designated as class A shares, and either a fraction of a warrant to purchase a share of common stock, or one warrant to purchase a fraction of one share of common stock. These follow-on equity raises customarily take the form of a forward purchase agreement or a PIPE commitment. If the business combination is approved by the shareholders (if required) and the financing and other conditions specified in the acquisition agreement are satisfied, the business combination will be consummated (referred to as the De-SPAC transaction), and the SPAC and the target business will combine into a publicly traded operating company. The units sold to the public typically include a fraction of a warrant to purchase a whole share, while the sponsor purchases whole warrants. Partners that materially participate in the business can avoid the net investment income tax on the exchange of their partnership interest for the publicly traded shares. (See above regarding SEC review.). Bid On HuntsvilleREQUESTS BIDS FOR MICROSOFT M365 M3. Nary a day goes by when we do not get an inquiry about SPACs. When the SEC staff clears the proxy statement or the registration statement, the SPAC will schedule a shareholder meeting to vote on the business combination with the target and will deliver a final proxy statement to its shareholders and/or a proxy statement-prospectus to the target equity holders. 1NYSE and NASDAQ listing requirements would permit an amount less than 100% of the gross IPO proceeds to be funded into the trust account, but market practice is to fund 100% or more so that, when the SPAC liquidates or conducts redemption offers, the public shareholders should receive at least $10.00 for each public share purchased. The sponsor is often a new limited liability company formed solely for the purpose of sponsoring the SPAC. Connecting with our core purpose through a renewed lens. The proxy process can take three to five or more months to complete from the date a definitive agreement for the De-SPAC transaction is signed. Most private companies either do not have audited financial statements or have financial statements audited under the AICPA rules. From the beginning of 2014 through November 30, 2017, almost 80 SPAC IPOs have closed, raising approximately $19 billion in gross proceeds. Copyright 2023 BDO USA LLP. Our family-run single estate vineyard, winery and distillery located in Essendine, Rutland is home to over 11,000 vines; the first of which were planted in 2019. If the SPAC had a target in mind, the SEC would require disclosure of the name of the target and information (financial and otherwise) about the target. Recently, the most common structure has been that the units sold in the IPO would include a half warrant, although one-third of a warrant is more common in larger IPOs. In most instances, a SPAC will not hold a public election for directors until the De-SPAC transaction or thereafter, and some SPACs provide that only the founder shares vote in director elections until the De-SPAC transaction. With nearly 400 US Veterans and Patriots, our mission is to deliver the highest quality, most 900 Broadway Street, San Antonio, TX 78215. In a SPAC IPO, the typical discount structure is for 2% of the gross proceeds to be paid at the closing of the IPO, with another 3.5% deposited into the trust account and payable to the underwriters on closing of the De-SPAC transaction. SPACs are required to either consummate a business combination or liquidate within a set period of time after their IPO. Thank you. In many SPAC structures, the founder shares automatically convert into public shares [4] at the time of the de-SPAC transaction on a one-for-one basis. In a traditional IPO, the issuance price is determined at the time of the IPO after a lengthy SEC review process and roadshow, and is subject to full market risk during this process. (go back), 4Although the shares issued upon conversion of the founder shares are of the same class as the public shares, their resale would need to be registered under the Securities Act or eligible for an exemption from the registration requirements. As the SPAC and target work towards a business combination agreement, share dilution becomes a key negotiation point of the SPAC. Sponsors may earn a substantial return on their at-risk capital and promote, in return for identifying suitable operating business combination targets. The choice is up to you. In addition to understanding the benefits of using a SPAC, it is important that SPAC sponsors and shareholders of target companies understand and plan for the federal income tax consequences associated with SPAC structures. The SPAC and the transfer agent will enter into a warrant agreement that specifies the terms of the warrants. A SPAC will file a registration statement on Form S-1 with the U.S. Securities and Exchange Commission to register the units, the public shares and the public warrants issued in its IPO. In addition, the sponsor agrees not to transfer or sell the private placement warrants until 30 days after the completion of the business combination transaction with the target. The Basics of SPACs - SPAC Guide by ClearThink Capital The sponsor pays a minimal amount, typically $25,000, for founder shares, referred to as the promote. The U.S. capital markets have seen record levels of merger and acquisition activity over the last few years, including record use of special purpose acquisition companies (SPACs) to facilitate initial public offerings (IPOs). SPAC sponsors and insiders ("initial shareholders") typically purchase an initial stake of "founder shares" in the company for a nominal amount before the IPO. BurTech Acquisition Signs Non-Redemption Agreement Covering 4M Shares Paul Weiss Discusses How to Mitigate SPAC Litigation Exposure The timing of the issuance of the founders shares should be carefully planned to avoid undesirable tax consequences for the sponsors. The SPAC also enters into an investment management trust agreement with a trustee, which governs the investment and release of the funds held in the trust account after the IPO. The sponsors are generally granted an initial, separate class of "founders shares" for a nominal cost, which normally convert to public shares on the completion of the de-SPAC transaction. Fund agreements may limit the ability of the investment manager to form a SPAC outside of an existing fund. SPACs are blank-check companies formed by sponsors who believe that their experience and reputations will allow them to identify and complete a business combination transaction with a target company that will ultimately be a successful public company. This is inaccurate. Complete a blank sample electronically to save yourself time and money. The management team that forms the SPAC (the "sponsor") forms the entity and funds the offering expenses in exchange for founder's shares. What You Need to Know About SPACs - SEC.gov | HOME The necessary audit or reaudit of the target companys financial statements is thus often a gating item for the De-SPAC transaction, and if the financial statements are not auditable, the target business is not suitable for a SPAC acquisition. The SPAC and the sponsor enter into an agreement pursuant to which the sponsor purchases the founder warrants. Google signed an agreement with an Iowa wind farm to buy 114 megawatts of power for 20 years. Kramer Levin Naftalis & Frankel LLP. The group of people who form and provide the risk capital for a SPAC are referred to as "Sponsors". However, SPAC sponsors also have a deadline by which they have to find a suitable deal, typically within. The PCAOB rules require that the auditor be registered with the PCAOB, meet qualification standards and be independent of the audited company and require a lower threshold for materiality. SPACs go through the typical IPO process, although the sponsors. Private equity managers contemplating sponsoring a SPAC face unique considerations, including where the sponsor should reside in the fund structure and whether the fund documents permit the formation of a SPAC. Some of these restrictions were adopted by the SEC in 2005 in response to the perceived use of certain shell companies as vehicles to commit fraud and abuse the SECs regulatory processes. SPACs - Potential Gains and Returns for Sponsors - Shanda Consult [6] The NYSE rules have recently changed, such that the NYSE and NASDAQ listing requirements are substantially similar, and pricing is comparable. While the staff of the SEC is reviewing and providing its initial comments on the registration statement, the sponsor selects its underwriter, its management team and board members, and investors in the at-risk capital. In cases where the forward purchase commitment comes from a private equity fund or other investor with a limited investment mandate, it may be appropriate to condition the obligation of the investor on the De-SPAC transaction satisfying the investment mandate of the investor. (go back), 2Other investments raise Investment Company Act considerations for the SPAC during the period before it completes its De-SPAC transaction, as well as risk issues around whether the trust account will have sufficient cash to return $10.00 per public share to public shareholders on a redemption or liquidation. There are numerous other tax and non-tax considerations when planning for SPAC transactions. (See below.) The target companys shareholders exchange stock constituting control of the target company for voting stock of the SPAC; At least 80% of the total consideration paid to the target companys shareholders is SPAC voting stock; and. Formed by individuals with experience and reputations to allow them to identify and acquire one or more target businesses that will ultimately be successful public company/s. There are no historical financial results to be disclosed or assets to be described, and business risk factors are minimal. The sponsor will typically purchase founder shares prior to the SPAC IPO filing. The sponsor team will consist of the sponsor, a management team and the directors of the SPAC. Historically, SPAC Sponsors needed to raise an amount to serve as risk capital or "sponsor capital" equal to between 3% and 5% of the projected public capital raise for the SPAC. The sponsor of the SPAC will purchase warrants in an amount equal to the 2.0% upfront underwriting discount of the IPO (see below), plus funds to cover the offering expenses and expenses to find a target, with the aggregate price of the purchased warrants in most recent deals hovering between 2.3% to 3.0% of the gross IPO proceeds. Often, existing investors in the SPAC will invest in the PIPE transaction, demonstrating their support for the de-SPAC business combination. This post is based on a Vinson and Elkins publication by Mr. Layne, Ms.Lenahan,Terry Bokosha, Mariam Boxwala, and Zach Swartz. Read about the challenges and opportunities that could lie ahead. Among other things, it explains what a SPAC is, lays out the economic terms of the equity offered in a SPAC IPO, introduces the players that inhabit the SPAC world and describes the benefits of going public in combination with a SPAC instead of through a traditional IPO. In a SPAC IPO, the underwriters will receive a discount of 5.5% of the gross proceeds, but only 2% of the discount will be paid at the closing of the IPO. A de-SPAC transaction will ordinarily take less time overall to consummate than an IPO. The sponsor and the SPACs officers and directors will waive redemption rights with respect to their founder shares (and any public shares they may purchase) in connection with the De-SPAC transaction or a charter amendment to permit an extended period to consummate the De-SPAC transaction, effectively agreeing to stay invested in the SPAC through the closing of the De-SPAC transaction or until liquidation. SPAC financial statements in the IPO registration statement are very short and can be prepared in a matter of weeks (compared to months for an operating business). In addition to the contracts and documents described above, the SPAC also adopts bylaws in connection with its formation, which are relatively standardized among Delaware SPACs and contain customary provisions for a publicly traded Delaware corporation. Psyence Biomed, also referred to as "Psyence Therapeutics", is a division of Psyence, which is developing natural psilocybin medicinal formulations and treatment protocols for the treatment of. After this date COVID-19 cannot be the reason to make tax free "qualified disaster relief payment under IRC Sec. There are three distinct phases in the life of a SPAC: SPAC formation and IPO, SPAC target search, and the SPAC merger (de-SPAC). (go back), 8For example, Please expand [your] disclosure, if accurate, to affirmatively confirm that no agent or representative of the registrant has taken any measure, direct or indirect, to locate a target business at any time, past or present. Bid On HuntsvilleREQUESTS BIDS FOR MICROSOFT M365 M3. All bids for the Psyence Announces Business Combination between Wholly Owned Subsidiary After the de-SPAC, the capital structure from the perspective of the target equity holders will oftentimes be similar to what it would have been had the target conducted an IPO. The per unit purchase price is almost always $10.00. Most SPACs initially file their registration statement confidentially.