Lately, there has been renewed interest in Special Purpose Acquisition Companies, SPACs. A SPAC is a blank check company “organized for the purpose of effecting merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in a specified industry.” One reason is a discernible shift in the U.S. Securities and Exchange Commission’s attitude towards them, says Saul Berkowitz, managing director at RSM McGladrey, Inc., a national business consulting, accounting and tax firm.

“Given the number of recent SEC filings, the SEC has recognized these entities to be a real part of the investment banking marketplace,” Berkowitz says.

Adding to their appeal, notes Larry Reilly, Senior Manager in Geller & Company’s Emerging Business Group, is the fact that SPACs “provide a clean public shell. They give target businesses the ability to go public without the normal time and expense constrictions involved in a traditional IPO (initial public offering).”

Attributes of a Successful SPAC Most of the funds raised in a SPAC are held in trust to be used for a merger or acquisition within two years. The target of the acquisition must have a fair market value equal to at least 80% of the SPAC’s assets at the time of the deal, which must be approved by a majority of voting shareholders.

A successful SPAC typically requires a founder with recognized expertise in the particular space in which the SPAC ultimately plans to invest, Berkowitz says. “If you know the insurance business, for example, that is what you go out and do. You have to have an organization behind you to help you achieve your goal, and you need to have a plan in place that will make it possible to close the deal within two years,” he says.

Having the right support team in place is a critical point, Reilly adds. “The founders have a limited window in which to identify and research potential merger/acquisition targets. Then they have to get the deal done – all within a relatively short period of time,” he says. “That has to be the focus of their efforts, and it often involves a lot of travel. They must rely heavily on a client service team to assist them with services such as bookkeeping, timely filing of required SEC documents and investigation of complex accounting issues.”

“An investor can liquidate at any time, since a SPAC is traded in a public market, and historically, they have been more successful at raising greater amounts of money than traditional IPOs.”

A SPAC is not a financing approach, per se, Berkowitz stresses. “The principals in a SPAC deal are saying they are prepared to sell their company and will take some of the price in stock,” he explains. “But they will have public investors in for a majority percentage of the ownership. The sellers will end up with cash in their pockets but will have to be a continuing part of management. Their goal is not to run the company on a day-to-day basis, but to be representatives of the public investors on the board.”

SEC Recognizes the Value of SPACs If the SEC has adopted a friendlier attitude toward SPACs, the tremendous increase in the number of private equity deals in recent years may be part of the reason. Unlike private equity, SPACs are regulated by certain SEC rules, including required filing of financial statements. They also provide more transparency than private equity, and, since they are publicly traded, greater liquidity to investors.

“An investor can liquidate at any time, since a SPAC is traded in a public market,” Reilly says. “Along with the safety net of SEC regulation, SPACs also come with an experienced management team. Historically, they have been more successful at raising greater amounts of money than traditional IPOs. Another difference from IPOs is that investors are allowed to vote on the type of business merger being enacted and can liquidate their shares if the deal is not approved by a majority vote.”

Another factor influencing the SEC’s view of SPACs may be the realization that this is truly a risk investment for the deal’s initiators. “The founders typically put up between 3% and 5% of the capital,” Berkowitz says. “The public’s money is not really at risk, but the founders’ money is. Their investment covers the cost of going public into the SPAC and doing the due diligence. If they don’t conclude a deal within the required timeframe, their investment is at risk.”

SPACs have a lot to offer, especially for companies that want to go public but otherwise would not be able to and for those in industries where financing is not widely available. However, these are not cookie-cutter deals. “The key thing to keep in mind is that you need a knowledgeable team of both founders and professionals to get through this process,” Berkowitz says. “You really have to think through the entirety of the process before you start. Some have not done that, and those are the ones that have gotten into trouble.”

For more information, please contact Larry Reilly at lreilly@gellerco.com.