One of the buzzwords in business in 2020 has carried over into 2021 in a major way. While special-purpose acquisition companies (SPACs) are hardly new, the concept took off last year in a way that we had never seen before. And in just three full months of 2021, the numbers are simply staggering.
Per SPACInsider.com, there already have been more SPAC IPOs this year (298) than there were all of last year (248). There already has been more than $97.1 billion in SPAC gross proceeds this year, eclipsing last year’s mark of $83.3 billion and obliterating the $13.6 billion generated from SPACs just two years ago.
Even as recently as 2016, a total of 13 SPACs that year generated $3.5 billion in gross proceeds. Clearly, the popularity of SPACs has exploded in the last 12-24 months. But why? And should you get involved? What are the benefits, and what major risks do you need to know about? Let’s explore each of those topics, along with how Baker Tilly’s Value Architects™ from coast-to-coast can serve as your SPAC advisors every step of the way.
A SPAC is a shell corporation, essentially a “blank-check company,” formed with the sole intention of raising capital through an IPO. The goal of a SPAC is to acquire an existing private company (or multiple companies), thus making the company (or companies) public. Upon going public, SPACs have no business operations and typically do not even have any stated targets for acquisition. The shell company’s management team, known as the sponsors, typically has two years to complete an acquisition, or else funds are returned to the investors.
SPACs have existed for decades, but as referenced earlier, they had not experienced significant growth until the last two years. Why have SPACs surged in popularity? There are a variety of reasons, which are directly associated with the following benefits that SPACs present to private companies.
But why the sudden surge? Years ago, SPACs had a negative connotation. There were some horror stories – fraudulent shell companies that either did not exist or did not have everyone’s best interests in mind. However, crooked shell companies are not as common these days, which has helped improve the way SPACs are viewed in the marketplace.
The pandemic has played a role in the recent popularity of SPACs, as well. To begin with, many companies postponed their plans to go public through a traditional IPO due to the complicated COVID-19 environment. Many of these companies have been seeking alternate routes to becoming public, with SPACs being the most popular. Another factor is that the growth in the stock market has created more people with money to spend and more overall liquidity in the market. And finally, the backing of hedge funds has been significant. For instance, by underwriting SPACs in large numbers, Goldman Sachs and Citi have created a stable foundation and a steady look for SPACs in the marketplace. Due to these factors, the public has more confidence in SPACs – and more ability to take advantage of their benefits – than ever before.
Some companies have been swept up in the excitement over SPACs and are diving into the water before they’re ready to swim. Companies, in some cases, are underestimating their IPO readiness, including whether their financial records and reporting are up to PCAOB standards and whether their tax compliance and tax structure are where they need to be. The risk is that many companies are going to end up becoming public companies before they are truly ready.
Furthermore, the SEC has cautioned businesses and investors to beware of SPACs that are backed by celebrities. “It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the SEC warned. Shaquille O’Neal, Serena Williams and Colin Kaepernick are some of the celebrities who are involved with SPACs in various capacities.
Short sellers are also showing that they are skeptical of SPACs. Investments made by short sellers, who profit when a company’s stock price declines, have risen in value to $2.7 billion from $724 million this year alone.
With all this in mind, it is critical to find the right advisors to help determine whether a SPAC is a logical path for your company. The ability to go public relatively quickly can be attractive, but the SPAC boom has made the process seem easier than it actually is. Additionally, the grass is not always greener on the other side. The implications of being a public company are significant – the regulatory compliance, the frequency of the filings, the additional liability, the lack of control and the increased cost, just to name a few. Having the right advisors – experienced and candid communicators – is an imperative step of this complicated process.
SPACs are not limited to any one industry, although we see them more frequently in certain key sectors. We primarily talk to clients that are exploring SPAC possibilities across the industries highlighted below.
When we look back one day at the rise of SPACs in 2020 and 2021, there are going to be winners and losers. What companies are going to win? The ones that prepare in advance, the ones that connect with the right SPAC sponsors and the ones that work with experienced advisors every step of the way.
Baker Tilly is currently assisting many companies interested in SPACs at every stage of the process – from initial planning discussions to the detailed intricacies of becoming a public company through a SPAC, including the complications involved with major transactions. As we mentioned, being attractive to potential SPACs is about much more than just being auditable. It’s about the infrastructure and scalability of your company. It’s about your management team, your operations, your internal controls, your tax structure, and so much more.
Baker Tilly specialists understand these key areas from multiple viewpoints, as not only are we are audit and tax advisors, but we work closely with investors, SPAC sponsors, and private and public companies at every stage of their lifecycle.
As you contemplate a journey involving SPACs, we can assist you with every phase of the process, collaborating with your management team as much as you require and as much as you desire. We can help enhance the variables of your company that SPACs examine closely, allowing you to appear as an attractive fish in a competitive ocean.
Baker Tilly partners Mallory Thomas and Ernest Miranda are ready to listen and happy to discuss whether a SPAC is the right path for your company. SPACs can be a smart strategy and a profitable option. With your needs in mind, our Value Architects can help you achieve your vision.
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.