Google “SPAC Attack.” Go on; I’ll wait. My search results have over 15 pages of articles with the phrase “SPAC Attack” in the title, including such zingers as “When SPACs Attack! A New Force Is Invading Wall Street” and “Dawn of the SPAC Attack.” Other puns on the word SPAC abound: I considered titling this blog entry “SPAC Attack: SPACulating on the SPAC-Tacular SPAC-Tastic World of SPACs.”
But what are SPACs, besides the pun darlings of the finance world? The term SPAC stands for special purpose acquisition company, which is an accurate description of what the company is. A SPAC is a company that exists solely for the purpose of acquiring a private company (or part of a public company that is being spun off) and taking it public.
A SPAC is a shell company, which means that it doesn’t have a core business or operations and doesn’t produce revenue. The value of the SPAC lies in the expertise of the management team, who will hopefully oversee a successful acquisition.
Because SPACs don’t have a source of revenue, they raise capital through an IPO. Investors buy shares or units in the SPAC in the hopes that eventually their funds will be used to acquire a successful company and they’ll end up owning stock in that company. The funds invested in the SPAC (less expenses) are held in a trust until the acquisition occurs.
After its IPO, the SPAC generally has to acquire another company within 18 to 24 months but isn’t obligated to acquire any specific company or even a company in any specific industry. SPACs are often called “blank-check” companies, because investors in the SPAC have essentially given the management team carte blanche to use their funds to acquire whatever company they think is best.
We often assume that the path of a startup will culminate in an IPO. But another, often faster, way to become a public company is to be acquired by a company that is already public. If a startup is acquired by a company that already has operations and a core business, the startup is often simply absorbed into that larger company. Occasionally the target continues to maintain its own corporate identity, but this often isn’t the case.
When a SPAC acquires a startup, however, the SPAC becomes the startup. The SPAC will have fulfilled its purpose once the acquisition occurs and no longer needs to exist. At that point, it is “de-SPACed,” and the acquired company becomes the public entity.
The article “Why Companies Are Joining the SPAC Boom” by PwC explains some of the reasons startups might find acquisition by a SPAC preferable to an IPO. The TLDR version is that acquisition by a SPAC can enable a start-up to go public on a faster timeline with less risk than an IPO, while raising comparable amounts of capital.
Just like any change-in-control, acquisition by a SPAC has many implications for the equity programs of the start-up company.
One of the most significant implications of a SPAC is the abbreviated time frame in which the company becomes public. With a traditional IPO, which can take anywhere from one to two years, the start-up has a lengthy ramp-up period in which to develop the infrastructure needed to support the company and its equity plans going forward. A SPAC transaction can happen in just five to six months (or sometimes faster).
If a startup is acquired by a traditional public company with its own operations, that company will have the necessary infrastructure already in place, but this won’t be the case with a SPAC. The SPAC-acquired company must quickly learn how to function as a public company. In the context of equity plans, this includes working with brokers and transfer agents, facilitating equity transactions and tax payments for employees, ensuring that grants to executives are approved by a board compensation committee that meets all necessary independence requirements, implementing procedures for Section 16 compliance and insider reporting, submitting equity plans for shareholder approval (and understanding proxy advisor concerns), applying the corporate tax deduction limit under Section 162(m), and preparing public filings.
In the article “Executive Compensation in a SPAC Transaction—By Failing to Prepare, Are You Preparing to Fail?,” Robert James of Pearl Meyers notes that because SPACs allow startups to go public earlier than they might have anticipated, “merger targets often lack the built-out compensation and incentive frameworks that would be typical at other late-stage growth companies.” Among other concerns, SPAC targets should think carefully about what their equity strategy will be once they are public, the size of share pool they’ll need for future equity awards, and the governance policies they’ll need to have in place.
Some private companies grant RSUs in which vesting is tied to an IPO or CIC. It is also common (and a best practice) for equity awards to protect award holders in the event of a CIC by stipulating some sort of payment/settlement to holders if outstanding awards aren’t assumed by the acquiring corporation (or replaced with substitute awards). But it can be challenging to draft equity plan change-in-control provisions that cover every possible CIC event.
An acquisition by a SPAC may or may not be treated as a CIC under the terms of the plan. Likewise, the company may or may not want the acquisition to be treated as a CIC for equity award purposes. The CIC implications are discussed in the article “SPAC Resurgence and Equity Incentive Compensation: A Quick Look at Change in Control Considerations for Stock Options” published by the Practising Law Institute.
Shell companies can’t rely on Form S-8 to register equity plans with the SEC (see “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.” Generally, this isn’t a problem because shell companies don’t have any operations and, thus, aren’t typically issuing equity awards. But in the case of a SPAC that has acquired a start-up, registration of equity plans on Form S-8 may be desirable.
The good news is that once the acquisition has closed, the surviving entity won’t be a shell company; it will be a traditional company with its own operations that will eventually be eligible to rely on Form S-8. But this eligibility doesn’t kick in until 60 days after the combined entity has filed current Form 10 information, which doesn’t happen until closing (up to four days after the closing). That leaves a two-month window during which the company can’t rely on Rule 701 (because it is public) or Form S-8 for its equity awards.
Many startups are interested in implementing an ESPP at the time they go public. This likely won’t be possible for startups that are acquired by SPACs because the combined entity won’t be able to file a Form S-8 for the ESPP until two months after the acquisition closes. Thus, the company will most likely have to wait until its stock has been trading for two months to implement an ESPP.
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