Like many US financial innovations exported worldwide, SPACs have garnered a mix of enthusiasm from companies and investors, and caution from regulators in Asia. For Asian companies looking to de-SPAC in US markets, our authoring partners have compiled a set of lessons learned to allow businesses to maximize the odds of success in using this innovative deal structure.
Some top tips for consideration include:
Have a clear thesis in mind
Many companies seem to jump on financial innovations to make quick returns. For much of 2019 and 2020, SPACs had that flavor. Going public at a guaranteed valuation with no revenue track record seemed too good to be true. Unfortunately, it was.
Not all sponsors are equal
With 650 or so SPACs in the market, a 'public-company ready' late-stage target has no shortage of suitors. How, then, does one select the right SPAC?
It is not all about valuation
Since nearly all de-SPACs are fundraising events, the valuation should be thought of as the pre-money valuation offered by the SPAC. However, as SPAC funds are subject to redemption, the SPAC cannot generally guarantee funding at that negotiated valuation.
It is all about the PIPE
With redemption running at high percentages, any funds raised in the SPAC's IPO should be considered at-risk capital. Even if sponsors offer up a minimum cash closing condition, that closing condition only comes into play late in the process, when it is generally painful to terminate due to sunk costs and market perceptions.
Be public company ready
SPACs have rightly been marketed as a faster way to go public, but faster does not mean skipping any steps. Companies will still need two or three years of Public Company Auditing Oversight Board-audited (PCAOB) financial statements to go public, and will still need adequate internal controls to be able to give required Sarbanes-Oxley compliance certifications.
Projections
For many SPACs, forward-looking projections are crucial since historic financials may not justify their desired valuation and anticipated growth.
Transaction fees
Going public is inherently an expensive proposition. A de-SPAC comes with visible and invisible fees. On the visible side, issuers should expect to pay underwriting fees for the initial IPO, legal fees for two sets of counsel, investment banking fees for the de-SPAC advisory services, and accounting fees. But it is the dilution built into the de-SPAC structure itself that is the highest hidden cost.
Avoiding litigation
Perhaps nothing epitomizes the US public markets more than shareholder litigation. The single-largest source of risk for de-SPACs is co-called disclosure claims (i.e. allegations that the target company made misrepresentations regarding the state of its business in public disclosures).
Be flexible
SPACs are a fast-changing space. Changes in regulations concerned with foreign investment and even international political tensions can make some de-SPACs more challenging.
Choosing the right advisors
Because SPACs are such a new instrument in the region, many local adviser teams have never directly worked on a de-SPAC transaction. It is not uncommon – and generally beneļ¬cial – for advisers to work in cross-border teams between the home country and the US. The local team can leverage the greater expertise of US practitioners in de-SPAC transactions while still providing on-the-ground local knowledge.
*This article was first published in Asia Business Law Journal