Special purpose acquisition companies (SPACs) have been around for decades, but have grown in size and prominence in recent years. Last year, 237 SPAC IPOs raised approximately $80 billion. Q1 2021 eclipsed that entire year’s total, counting 300 SPAC IPOs in a single quarter, raising $88 billion. Many of the transactions behind the 2020 SPAC uptick were driven by companies investing in connected, autonomous, shared, and electrified technologies, with a noticeable increase in green transactions. Morgan Lewis lawyers detail why SPACs have become so popular and some of the important considerations for investors looking to use SPACs in the automotive and mobility sector.
- During the boom of 2020, many de-SPAC targets had little to no operating history with a focus on projections. In the more recent past, many targets have been more mature companies with clear operating histories that substantiate the deal valuation. In part this is due to many de-SPAC transactions trading down after the deal is effectuated, so the market is looking for more mature companies where they can more accurately validate financials and forecast how the companies will perform.
- The private investment in public equity (PIPE) market has gotten increasingly more difficult with (i) increased downward pressure on valuation by PIPE investors, (ii) PIPEs taking longer to get fully subscribed, if at all, and (iii) anchor PIPE investors expecting more from sponsors in consideration for being anchor investors. There have also been increasing levels of SPAC redemptions as many SPACs are trading below their redemption value. While deals are getting done, in the automotive space and otherwise, there is an increased focused on financial fundamentals to ensure that a deal ultimately will be successful.
- On April 12, the SEC’s Acting Director of the Division of Corporation Finance and Acting Chief Accountant issued a statement that caused widespread disruption for SPAC IPOs, business combinations, and de-SPAC companies with outstanding warrants, by indicating that two common features of warrants may prevent the warrants from qualifying as equity instruments and require classifying them as liabilities for accounting purposes. This statement led most SPACs and de-SPAC companies to restate their financial statements to account for the warrants as liabilities. Most such restatements are now complete. However, this process led to a slowdown in SPAC transactions in late April and May.
- Although fairness opinions, which are provided by an independent financial adviser to a board of directors, had traditionally been rare for buyers in deSPAC transactions,they are becoming increasingly common.
- Stockholder litigation had also been rare in SPAC transactions. However, such litigation is becoming increasingly common as the plaintiff’s bar has turned more attention to the SPAC market.
While deSPAC transactions do offer some advantages over a traditional IPO, including what is oftentimes a faster timeline, access to additional funds beyond what the SPAC raised in its IPO, and confidentiality in the event a deal falls through, interested investors should take into account the new SEC rules and increased litigation when evaluating potential acquisitions.
For more information on SPACs in the transportation sector, please see Morgan Lewis Automotive Hour’s SPACs and Other Vehicles for Investment in the Automotive and Mobility Sectors.