Special Purpose Acquisition Companies or SPACs are now being taken seriously due in part to the waning frequency of initial public offerings. All major investment banks have underwritten them, and they are either eligible to be listed or are currently being eyed for listing on all three major U.S. stock exchanges.
“The availability of three markets could go far in ensuring the continued viability of SPACs,” says Mark A. B. Carlson, a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta and co-leader of the firm’s Corporate Mergers & Acquisitions group.
Smart Business spoke with Carlson about SPACs’ potential as financing vehicles and the rules they must abide by.
What is a SPAC?
A SPAC is a nonoperating company that raises capital for a future, unspecified acquisition. Once the SPAC targets an operating company (usually private) to acquire, it must obtain the affirmative vote of the SPAC’s stockholders to complete the acquisition. SPACs often voluntarily escrow at least 90 percent of their offering proceeds until the earlier of the approval of an acquisition or 18 to 24 months after the date of the initial registration statement with the Securities and Exchange Commission (SEC). Further, prior to the AMEX standards, SPACs faced the significant obstacle of being ineligible to list on stock exchanges. In turn, they were not ‘covered securities’ and were subject to state blue-sky registration.
Why have SPACs gained legitimacy in recent years?
SPACs have gained legitimacy in recent years as the frequency of initial public offerings has waned. All major investment banks have underwritten SPACs and, despite a slowdown in the second quarter of 2008, the financing vehicles are likely to remain part of capital markets for years to come. Although SPACs have been eligible to list on AMEX for more than two years, the NYSE and NASDAQ have now proposed and/or adopted standards that will allow the listing of securities of a company that has but one asset, cash and no underlying business.
What rules must SPACs conform to under the NYSE?
First, the NYSE’s listing standards were approved by the SEC on May 6, 2008, and are now part of the NYSE’s Listed Company Manual. Under the NYSE’s listing rules, the SPAC must escrow into trust at least 90 percent of the IPO proceeds until the SPAC consummates a business combination with a fair market value of at least 80 percent of the net assets of the trust. Furthermore, the shareholders must be granted the right to approve a business combination by majority vote, and those who vote against the transaction must be given the right to convert their shares into cash equal to the amount of their proportional share of the escrowed funds. The NYSE’s rules give SPACs three years to complete the acquisition of an operating business. Under the listing standards, SPACs must have an IPO price of at least $4 per share, a post-IPO aggregate market value of at least $250 million and a market value of publicly held shares of at least $200 million.
Where do SPACs now stand as far as being listed on NASDAQ?
On April 18, 2008, NASDAQ submitted its proposed SPAC listing standards to the SEC. Though not yet approved by the SEC, the standards would allow SPACs with market values of $75 million to list on the NASDAQ Global Market (or $50 million in the case of the NASDAQ Capital Market), which allows for a larger group of SPACs than the NYSE standard. Like the NYSE standards, it is mandatory that the proceeds of the IPO be escrowed, an acquisition occur within three years of the IPO and the stockholders of the SPAC be given the right to approve the transaction.
Will SPACs ever be listed on all three exchanges?
If SPACs regain their traction after their slowdown in the second quarter of 2008, promoters and investors alike will be relieved to find up to three exchanges willing to list their securities. The availability of three markets could go far in ensuring the continued viability of SPACs.
MARK A. B. CARLSON is a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta and co-leader of the firm’s Corporate Mergers & Acquisitions group. He can be reached at (404) 589-3400 or firstname.lastname@example.org.