SPACs — Money goes public
From inception to closing, a SPAC transaction generally goes through three phases that must be completed within the first two years. Otherwise, the SPAC will be dissolved and investors will receive their investment back.
At the beginning of the 1st phase, capital is sought from investors for the formation of the SPAC. After the IPO (Phase 2), SPAC looks for a target company, often start-ups, but other companies may also be targets. The 3rd phase of the SPAC occurs when the sponsors or initial shareholders have decided on a target company. In order for a SPAC to become a new publicly traded company, the majority of investors must agree with the selected company.
If a target company is found, the SPAC and the target company merge and are in the capital market. In a “fourth” phase, the new company has to survive on the stock market and this is regularly underestimated.
For the sponsors or investors, the main advantage of a SPAC is that they do not have to deal with the company’s operations at the outset and can exchange their share certificates (approx. 20 percent of the outstanding shares, which are purchased at nominal value) for the invested capital at any time. — For small and medium-sized businesses, SPACs can create greater access to liquidity resources.
One of the risks is that the target company is unknown to investors when the SPAC is formed. They invest in a shell and trust that a SPAC Merger will occur and generate a return with the eventual target company. — For the target company, the reporting and disclosure requirements are complex, as they are usually very different from the previous requirements of their financial statements. Consultants are rather rare here in Germany.
For many investors, the experience with SPACs in Germany in 2008 to 2010 was less positive. The German market is developing hesitantly, with only three SPACs listed on the Frankfurt Stock Exchange. The first new SPAC in Germany after many years was Lakestar SPAC 1, which went public at the end of February 2021. 27.5 million “units” were placed at a price of 10 euros, with a volume of 275 million euros. On the stock market, Lakestar shares currently cost 7.50 euros, after the price had risen to 12.30 euros in the meantime. This is not unusual: most SPACs in the U.S., where nearly 300 such shell companies have already gone public in 2021 alone, are trading around their usual issue price of $10 or slightly above. However, the share price performance after a merger with a target company is often negative.
The prolonged policy of cheap money pursued by the leading central banks has made substantial liquid funds available on the capital markets. SPACs are an outlet for liquidity; they create a way to invest in an active business of companies through shell companies that are initially all cash. For start-up companies, SPACs are considered a “fast lane” to the stock market. For example, SPACs are a topic at nearly every IPO readiness meeting for companies. For understandable reasons: Because going public via SPACs is, at least apparently, much easier for small start-ups. Otherwise, the necessary capital will have to be collected at great expense. Careful attention must be paid to the many details mentioned, otherwise the frequently propagated “simplicity” of SPACs can very quickly turn into the opposite.
Thus, SPACs target a point between public capital market access and private equity houses. Regulators are called upon to absorb the extreme speed to curb the risk of crashes.
About Prof. Rüdiger Loitz
Prof. Dr. Rüdiger Loitz teaches national, international accounting and taxation at the Faculty of Business Administration of the University of Cologne since 2009, after studying and obtaining his doctorate in Cologne and Hamburg until 1996. A certified public accountant, tax advisor and U.S. CPA, he is a partner at PwC and leads the capital markets and accounting practice. He spent two secondments in England and Spain. He publishes regularly on financial reporting application issues, process and technology use in this environment. On behalf of the Chamber of Auditors and Tax Advisors, he participates in the examination of candidates for the profession. He lives with his family near Düsseldorf.