A Special Purpose Acquisition Company (SPAC) is a blank-check company formed for the purpose of effecting a business combination with one or more businesses. While SPACs are not new, they have recently increased in prevalence. In 2021, there were 613 SPAC initial public offerings (IPOs), a significant increase from 248 in 2020. The total SPAC IPO proceeds also increased from $83 billion in 2020 to more than $160 billion in 2021. De-SPAC merger activity in 2021 was also high, as 267 were announced and 199 closed.
What can the business community anticipate this year?
In 2022, it is expected that the SPAC market will encounter increased scrutiny from the Securities and Exchange Commission (SEC) and other regulatory agencies as well as intensified competition for targets and funding sources—for example, a tightened market for private investment in public equity (PIPE) financings. In fact, on March 30, 2022, the SEC proposed new rules and amendments intended to enhance disclosure and investor protections in SPAC IPOs and business combination transactions between shell companies, such as SPACs, and private operating companies. The proposals would, among other things, require additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution; more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an IPO; and deem underwriters in a SPAC IPO to be underwriters in a subsequent de-SPAC transaction when certain conditions are met.
Additionally, PIPE capital may become more limited, leading to alternative funding sources and arrangements to complete de-SPAC transactions. Alternative funding possibilities include SPAC issuances of convertible debt or preferred stock (fixed returns and equity upside to investors upon conversion) and other third-party backstop funding arrangements. PIPE investors may grow more skeptical of target valuations, size of sponsor promotes, and other deal terms, reducing their willingness to fund de-SPAC transactions absent more favorable terms.
As the SPAC market continues to evolve, attract attention, and raise new opportunities, it is important for businesses to keep in mind where SPACs came from and where they are headed.