Roger James Hamilton, CEO and Founder of Genius Group, a global entrepreneur education company, explores the new trend of special purpose acquisition companies (SPACs) taking companies public and how this is a great strategy for those businesses looking for rapid growth.
In recent years, we have seen the financial markets increasingly volatile and this has led to many companies looking for a different route to take their companies public. Many businesses now need the liquidity of an initial public offering (IPO) to fund business growth, yet the risk of doing so has never been greater.
IPOs are traditionally a major milestone for fast growing companies, and they are a great way to raise capital but there are many disadvantages, including being difficult, time consuming and expensive, with founders needing to put together a full package for investors, engage underwriters and pay out huge fees. There is also the risk, if the opening price is wrong, founders can end up losing billions.
So, what is the answer for businesses that don’t want to go down the traditional IPO route? In recent years we have seen a boom in companies using SPACs, which are ‘blank cheque’ companies, created solely to raise capital via an IPO in order to then merge with private companies. Merging with a SPAC allows companies to access liquidity via a public market.
As compared to traditional IPOs, SPACs can be significantly quicker. Due to its lack of fundamental operation, both financial statements and prospectus filed for a SPAC are significantly shorter and can be prepared in a matter of weeks (compared to months for a traditional IPO).
First created in the 1990s, SPACs were not very popular to start with and blue-chip investors tended to choose a more traditional route. The recent surge in SPACs has been mainly down to seeing more formed by blue-chip private equity firms, banks and entrepreneurs and being seen as a viable liquidity option.
So how does this uptake in SPACs enable business growth? In a short answer, it gives companies more access to capital. Small and mid-sized companies are not always ideal to go down the traditional IPO route but by merging with a SPAC they can retain a stake in their business and access capital that would normally not be available to them.
Less uncertainty is another plus for the SPACs route. With US stock markets fluctuating, traditional IPOs leave companies scrambling to float on the market at just the right moment. There is also the issue of setting the price correctly, as if it is set too low, companies risk losing big money. Alongside the need for certainty, especially in these troubled times, is a need for flexibility. As we enter new markets driven by the economic unrest of the pandemic, companies will need to retain some semblance of flexibility to add to their resilience and longevity. SPACs present companies with the flexibility to negotiate other terms and the transition can be structured to bring in additional funds through a private investment in public equity.
The uptick in these investment vehicles is being driven by a new generation of management teams and sponsors, which has resulted in higher standards when it comes to fundraising and the return on investment (ROI), building investors’ confidence in SPACs.
One area that businesses should be mindful of is that not all SPACs are the same and unlike a traditional merger deal, where the buyer and seller seek out business synergies, a company looking to merge with a SPAC needs to agree with the sponsor’s long-term business goal.
There are many benefits of merging with a SPAC, from greater access to capital to greater market certainty and the option to structure the deal to suit the company. However, being prepared is still hugely important if choosing this growth method. Audit and reporting uplifts, internal controls assessment and putting in place measures to meet public company reporting are all necessary.
Meeting regulatory requirements set by the Securities and Exchange Commission (SEC), which will review the SPAC merger filings, is imperative as this will be done to the same standards as an IPO. Being prepared and ready to operate as a public company will enable a swift SPAC merger.
To highlight the potential that SPACs can offer business, the UK is now looking to relax trading regulations in a post Brexit overhaul. Chancellor of the Exchequer, Rishi Sunak, said: “We’re determined to enhance this reputation now we’ve left the EU” and the Government are now looking at proposals to ignite the dormant market of SPACs.
2020 was the busiest year for SPACs with US$83 billion raised. What we are seeing is institutional investors piling money into investment vehicles, where the only business plan is to have a plan to buy other companies. SPACs are helping level the playing field and allowing more companies to go public without the extended paperwork, fees and risk. A great alternative to IPOs for many businesses and a proven strategy for business looking to grow quickly. What effect SPACs will have on the stock market is yet to be seen but could result in a collapse of the IPO market. Watch this space.
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