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Small and medium Business Finance Equity Program

Written by: Jayson Curuso

Article Overview: Many SPAC corporations are developed from Capital Pool Companies(CPC) or the USA as "Blind Pool" incorporation. Capital Pool companies are better known in the Canadian small Cap market to raise capital as describe herein.

Small and medium Business Finance Equity Program

A special purpose acquisition corporation, commonly known as a "SPAC", and formally a "development stage company", is generally incorporated with the primary objective of raising funds through a public offering of its securities primarily for purpose of acquiring one or more operating companies. However, it will typically begin as a corporation formed by a small group of industry executives or sophisticated investors (“Founding Stockholders”). The Founding Stockholders purchase the company’s common stock for nominal consideration and generally retain, after completion of the IPO, 20% of the SPAC’s common equity, although this percentage is less if the underwriters’ over-allotment option is exercised. Some or all of the Founding Stockholders also serve as the SPAC management team that will search for prospective target operating companies.

The most distinguishing characteristic of a SPAC is that it gives investors the opportunity to vote on potential transactions and redeem a portion of their proceeds held in the trust account if they vote against a proposed transaction.

A Step Up From Small Business Loans Include SPACs and Reverse Mergers
A SPAC is similar to a reverse merger. However, unlike reverse mergers, SPACs come with built-in investor teams and an experienced management team. They are also set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies in reverse mergers.

SPACs typically raise more money than reverse mergers at the time of their IPO. The average SPAC raises about $75 million through its IPO compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs also raise money faster than private equity funds. The liquidity of SPACs also attracts more investors as they are offered in the open market.

Hedge funds and investment banks are very interested in SPACs because the risk factors seem to be lower than standard reverse mergers. SPACs allow the targeted company’s management to continue running the business, where they will sit on the board of directors. After a transaction, the company retains the target name and may register trade on the NASDAQ.

Regulation
The Securities and Exchange Commission (SEC) is currently investigating SPACs to determine whether they require special regulations to ensure that these vehicles are not abused like blind pool trusts and blank-check corporations have been over the years. Many believe that SPACs do have corporate governance mechanisms in place to protect shareholders.

Advantages
SPACs are more transparent than private equity as they are regulated by certain SEC rules, including filing their financial statements. Since SPACs are publicly traded, they provide liquidity to an investor (i.e. investment comes in the form of common shares and warrants which can be traded). The unique benefits are the special rights of shareholders to vote in approval or rejection of the deal and the ability for investors to regain most of their funds if the SPAC was unsuccessful. In addition, it is an opportunity for individuals not qualified to buy into hedge or private-equity funds to participate in the takeovers of private operating companies that those funds typically do. Additionally, the SPAC vehicle for the target company is the opportunity to effect a reverse merger that yields more capital.

Disadvantages
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks include:
• limited liquidity of their securities
• loss of 0-15% of their investments if no M&A deals are made
• lack of investment diversification
• lack of management’s time devoted to SPACs due to involvement in other ventures

There is also potential for delay and expense attributable to the public shareholders' special rights and the costs of functioning as a registered public company.

Restrictions Involved
SPACs generally self impose certain restrictions on their own activities, as well as those of their respective management teams, subsequent to their IPO to provide protection for their investors. These restrictions generally include, among other things, the following:
• Submission of Offering Proceeds in a Trust

As an essential investor protection in a SPAC, a large percentage of the IPO proceeds (generally above 90%), net of a portion of the underwriters’ compensation, but not of other offering expenses, is deposited into a trust account where the funds are invested exclusively in short-term government securities until the earlier of (i) the consummation of a business combination that has been approved by stockholders, and (ii) liquidation of the SPAC as discussed below.
• Limitation on Fair Value of Target Businesses

In order for a SPAC to consummate a business combination, the target business must have a fair market value representing at least 80% of the SPAC’s net assets (excluding deferred underwriters’ discounts and commissions held in trust) after the time of acquisition.

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Article Tags: funding, loans, small business



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