SPAC Glossary of Terms
de-SPAC Merger is the reverse merger of a target company into a SPAC, resulting in the business of the target becoming owned by a publicly traded reporting company under the 1934 Act. The merger requires approval of SPAC shareholders, who receive proxy materials that must be reviewed by the SEC. Often merger consideration is paid in SPAC stock, which must be registered by filing a registration statement on Form S-4. The Proxy and S-4 are filed together and receive comprehensive review by the staff of the SEC, including scrutiny of the financial statements included in the filings. The de-SPAC merger is essentially the SPAC acquiring an operating company.
Emerging Growth Company (EGC) is a regulatory designation under SEC rules that allow for companies that are newly public with a market cap of less than $1.07 billion. EGCs operate with reduced public-company regulatory burdens, such as filing two rather than three years of audited financials, exemption from adoption of certain accounting standards and the relief from requirement of an external SOX compliance report.
Lock-ups are contractual terms that prevent insiders from selling public company stock in the secondary market within a specified period after an unwritten public offering or other securities transaction, including a de-SPAC merger. Sponsors and target company investors are typically asked (by PIPE investors and SPAC IPO underwriters) to agree to a one-year lock-up after the completion of the de-SPAC merger.
Promote is the arrangement by which the sponsors of a SPAC, in exchange for a modest initial cash investment, receive shares that are convertible into 20% of the publicly registered shares of the SPAC that can be sold into the public market upon completion of the de-SPAC merger and after expiration of lock-ups. It is viewed as a finders’ fee for sponsors identifying attractive targets. The value of the Promote is essentially destroyed if the SPAC fails to complete a de-SPAC within the timeframe specified in its charter and has to return all of the IPO investors’ money.
PIPE (“private investment in public equity”) is a capital raising transaction in which institutional investors purchase shares from a public company at a price below the current market value of the shares as traded on an exchange. PIPEs are normally subject to a lock-up. Typically, PIPEs are used in a de-SPAC transaction to sell common stock to private investors who receive public shares in the de-SPAC’ed target. PIPEs are crucial to fund any redemptions by IPO investors and any cash portion of negotiated merger consideration paid to target investors.
Shell company is a regulatory designation under SEC rules which continues to make the target an “ineligible issuer” for twelve-months after the filing of the Super 8K for the de-SPAC merger. The shell company designation limits the type of marketing material that can be used in follow-on offerings, requires that a company wishing to register additional shares on a Form S-3 submit to staff review and prohibits the registration of shares under an employee benefit plan on Form S-8 for at least 60 days following the filing of the Super 8K.
SPAC is a special purpose acquisition company created by Sponsors that conducts an IPO on a promise of finding a Target Company to combine with in a de-SPAC merger within a fixed period of time after the SPAC IPO.
SPAC IPO is the underwritten offer of common shares of a SPAC at a time when it has no other business operations
Sponsors or sometimes “founders” of a SPAC. Typically, these are experienced private equity, asset management or investment banking professionals or those who have particular industry experience that makes them credible as leaders who can raise capital and find attractive target companies to acquire. Sponsors have sometimes included celebrities with little applicable business experience.
Super 8K is an 8K required to be filed by the de-SPAC target no later than 4 business days after the completion of the de-SPAC merger. This filing includes all information that would be required on a Form 10 that was not included in the Proxy/Registration Statement.
Target Company is a growth company that a SPAC seeks to combine with in a de-SPAC merger.
Trust is a formal trust arrangement under which the proceeds of the SPAC IPO is held separate from the general funds of the SPAC and which are therefore available to fund redemptions by SPAC IPO investors if the de-SPAC merger does not occur within the required timeframe. Normally, the Trust invests the SPAC IPO proceeds in highly liquid government securities pending the de-SPAC merger.
Underwriters are firms, typically investment banks, who manage the offering of the common shares issued in the SPAC IPO. Underwriters are paid a fee (called an “underwriters’ discount”) typically 2.0 to 2.5 % of the amount raised in the IPO, with an additional 3.0% deferred until the completion of the de-SPAC merger. Underwriters in the SPAC IPO often (but not always) serve as advisors at the de-SPAC stage and earn fees for their roles as placement agents in the PIPE transactions.
Units are what investors in the SPAC IPO purchase, which typically are sold at $10 per Unit and include one share of stock and a warrant to purchase a fraction of a SPAC share at a premium to the offering price, typically $11.50 per share. Warrants are typically exercisable on the later of the completion of the de-SPAC merger and a date certain, often the 12-month anniversary of the closing of the SPAC IPO.
UP C or “umbrella partnership” is a special tax structure designed to give sponsors and other owners of a Target Company many of the benefits of that treatment while affording the liquidity benefits to investors from the business being operated through a publicly-traded corporation.
Warrants are instruments by which investors obtain the right to purchase stock at a negotiated price, typically a premium to the value of the underlying stock at the time the warrant is sold. Warrants are issued to two groups in a SPAC IPO. Warrants to purchase target company stock at a premium after a de-SPAC merger are included in the Units purchased by investors in the SPAC IPO. At the time of the SPAC IPO Sponsors acquire “private placement warrants” in exchange for investing cash that is used to fund the underwriters’ discount and other offering expenses.