OfferingsSPACs were traditionally sold via an initial public offering (IPO) in $6 units consisting of one common share and two "in the money" warrants to purchase common shares at $5 a common share at a future date usually within four years of the offering. Today, SPAC offerings are more commonly sold in $8–10 units which consist of one common share and one warrant. SPACs trade as units and/or as separate common shares and warrants on the OTC Bulletin Board and/or the American Stock Exchange (both the Nasdaq and the New York Stock Exchange have announced plans to list SPACs in 2008) once the public offering has been declared effective by the U.S. Securities and Exchange Commission (SEC), distinguishing the SPAC from a blank check company formed under SEC Rule 419. Trading liquidity of the SPAC's securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.
By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 98% to 100%.
The SPAC must sign a letter of intent for a merger or an acquisition within 12 to 18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 12 to 18 months, the SPAC can close the transaction within 24 months. Today, SPACs are incorporated with 24-month limited life charters that require the SPAC to automatically dissolve should it be unsuccessful in merging with or acquiring a target prior to the second anniversary of its offering.
In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition and a majority of shareholders voting must approve this combination with usually no more than 20% to 40% of the shareholders voting against the acquisition and requesting their money back.
GovernanceIn order to allow stockholders of the SPAC to make an informed decision on whether or not they wish to approve the business combination, full disclosure of the target business, including complete audited financials for it, and terms of the proposed business combination via an SEC merger proxy statement is provided to all stockholders. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange; these SPACs do not have the aforementioned voting thresholds.
As a result of the voting and conversion rights held by SPAC shareholders, only well-received transactions are typically approved by the shareholders. When a deal is proposed, a shareholder has three options. The shareholder can approve the transaction by voting in favor of it, elect to sell their shares in the open market, or vote against the transaction and redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool - blank check companies of the 1980s, which were a form of limited partnership that did not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within 24 months of the initial offering. This guarantees a minimum liquidation value per share in the event that a business combination is not effected.
ManagementThe SPAC is usually led by an experienced management team composed of three or more members with prior private equity, mergers and acquisitions and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2–3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 3% to 5% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation.
No salaries, finder's fees or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fudiciary duties. The SPAC is further prohibited from consummating a business combination with any entity which is affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.