SPAC overview and lifecycle. Partner, National Corporate Tax and Mergers & Acquisitions Technical Practice Leader, Managing Director, National Corporate Tax and Mergers & Acquisitions, Business Restructuring & Turnaround Services, Total Tax Transparency & ESG Tax Strategy, Financial Institutions & Specialty Finance, Important Tax Issues When Navigating a SPAC Transaction, BDO Knows SPACs: Tax Treatment of SPAC Founders Shares, Special Purpose Acquisition Companies Resources page, Do Not Sell My Personal Information as to BDO Investigative Due Diligence, Strategic partners and management expertise; and. Among other things, it explains what a SPAC is, lays out the economic terms of the equity offered in a SPAC IPO, introduces the players that inhabit the SPAC world and describes the benefits of going public in combination with a SPAC instead of through a traditional IPO. The SPAC and the sponsor (or an affiliate of the sponsor) enter into an agreement pursuant to which the sponsor (or the affiliate of the sponsor) provides office space, utilities, secretarial support and administrative services to the SPAC in exchange for a monthly fee (typically $10,000 per month). The criteria that will inform the search include: For founders or investors in a pre-IPO company, an initial public offering has traditionally been regarded as one exit strategy of choice. [6] The NYSE rules have recently changed, such that the NYSE and NASDAQ listing requirements are substantially similar, and pricing is comparable. Partners that materially participate in the business can avoid the net investment income tax on the exchange of their partnership interest for the publicly traded shares. Kramer Levin Naftalis & Frankel LLP. SPAC financial statements in the IPO registration statement are very short and can be prepared in a matter of weeks (compared to months for an operating business). Learn more. Most SPACs seek domestic targets, and those that do are organized in Delaware. It is important to note that if the target is an S corporation, its S status will terminate in the de-SPAC transaction since a SPAC (which is taxed as a C corporation) is not an eligible S corporation shareholder. The best way to use this guide is to identify issues that may impact you, and then discuss them with your tax advisor. The founder shares are usually designated as class B shares. The time horizon for a typical de-SPAC transaction is three to four months, while a traditional IPO often requires six to nine months from commencement to completion. The absence of any promote in the Pershing Rice Acquisition Corp. to Combine Aria Energy and Archaea Energy into In a remarkable departure from the 20% promote model, the sponsor (Pershing Square TH Sponsor, LLC) of a recent SPAC (Pershing Square Tontine Holdings, Ltd.) has not taken any founder shares. If the SPAC may reasonably pursue a target outside the United States, a foreign SPAC may allow for a more efficient post De-SPAC structure if foreign assets are acquired, or the SPAC may redomicile into the United States if domestic assets are purchased. (go back), 3Occasionally, the unit includes a whole warrant to purchase a fraction of a share of common stock, rather than a fraction of a warrant. Also, the targets management team will likely continue in their roles in the surviving company, while benefiting from a new partnership with a well known sponsor team. If the public warrants are exercisable and the public shares trade above a fixed price (usually $18.00 per share) for a period of time, the public warrants will become redeemable by the company for nominal consideration, effectively forcing holders of the public warrants to exercise or lose the value of the warrants. The Basics of SPACs - SPAC Guide by ClearThink Capital The remaining ~80% interest is held by public shareholders through "units" offered in an IPO of the SPAC's shares. In these instances, the SEC staff will be especially keen on disclosure of any conflicts of interest that may arise in the sponsors identification and pursuit of potential targets for the various SPACs. A SPAC is formed by a group of sponsors, often well-known investors, private equity firms or venture capitalists. The offshore structure will introduce other tax issues, such as passive foreign investment company issues. Even if a shareholder vote is not legally required, the SPAC could elect to put the De-SPAC transaction to a shareholder vote for business reasons. The offerings of the founder warrants and the shares issuable upon exercise of the public warrants and founder warrants are not registered at the time of the IPO, but are typically subject to a registration rights agreement entered into at the time of the IPO that entitles the holders of these securities to certain demand and piggyback registration rights after the De-SPAC transaction. 3. The major differences between SPAC and blank check companies/penny stock issuers are that SPAC equity may trade on an exchange prior to the SPACs business combination, brokers are not subject to heightened requirements on trades in SPAC securities, SPACs have a longer time period to complete their business combinations and SPACs are not prohibited under SEC rules from using interest earned on the trust account prior to the business combination. For more information on the tax treatment of SPAC sponsors, see BDOs article BDO Knows SPACs: Tax Treatment of SPAC Founders Shares. Under the Up-C/Up-SPAC structures, either a C corporation or a SPAC raises funds through an IPO, which are then used to acquire an interest in the target partnership. Recent SPAC IPOs suggest that sponsors are increasingly agreeing to a smaller percentage of promote. After reading this primer, you will be able to answer the following question: what do Shaquille ONeal, Bill Ackman, Serena Williams, former House Speaker Paul Ryan, Alex Rodriguez and Chamath Palihapitiya have in common? (go back), 4Although the shares issued upon conversion of the founder shares are of the same class as the public shares, their resale would need to be registered under the Securities Act or eligible for an exemption from the registration requirements. Who should lead the charge? IPO proceeds are placed in a trust that earns interest. SPAC Sponsorship - Compehensive SPAC Guide by ClearThink Capital Today, consideration must also be given to a de-SPAC transaction in lieu of an IPO. The 2023 BDO CFO Outlook Survey offers critical insights to support strategic decision-making and help your company thrive. Regardless of whether the merger qualifies as tax-free, any consideration received other than SPAC voting stock, i.e., cash or other property (referred to as boot), will be taxable to the target shareholders. Recognizing the potential in SPACs, private equity firms and professionals have been assuming the role of SPAC sponsors in recent years. SPAC Services | Deloitte US Many contain features to automatically extend the period if a definitive agreement or letter of intent is signed by the end of the specified period or upon contribution of additional capital into the trust account by the sponsor. The U.S. capital markets have seen record levels of merger and acquisition activity over the last few years, including record use of special purpose acquisition companies (SPACs) to facilitate initial public offerings (IPOs). A SPAC investment has certain attractions for these investors. In a de-SPAC transaction, the transit time through the SEC involving a review of either a proxy statement for a shareholder vote on the de-SPAC transaction or a registration statement to register shares received by the target equity holders in the transaction is usually significantly shorter, and, as noted above, this review process takes place during the pricing. The sponsors are generally granted an initial, separate class of founders shares for a nominal cost, which normally convert to public shares on the completion of the de-SPAC transaction. This results in the founder shares equaling 20% of the total shares outstanding after completion of the IPO, including any exercise or expiration of the green shoe. According to reports in the financial press, the current SPAC market could not be more active. The public warrants compensate the IPO investors for investing in a blind pool. The 20% founder shares are often referred to as the promote.. View image. A SPAC can provide several benefits for target companies, including: The SPAC approach to an IPO takes much less time to complete as compared to a traditional IPO, therefore the amount of time needed to work with investment bankers, attorneys and other professionals to take a company public is potentially reduced. In a SPAC IPO, the typical discount structure is for 2% of the gross proceeds to be paid at the closing of the IPO, with another 3.5% deposited into the trust account and payable to the underwriters on closing of the De-SPAC transaction. With nearly 400 US Veterans and Patriots, our mission is to deliver the highest quality, most 900 Broadway Street, San Antonio, TX 78215. The sponsor and the SPAC enter into a securities purchase agreement providing for the issuance to the sponsor of the founder shares for $25,000. Drive maximum value across your supply chain. After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the business combination). A SPAC typically needs to raise additional capital to complete the de-SPAC business combination transaction. SPACs have the following characteristics: In a forward purchase agreement, affiliates of the sponsor or institutional investors either commit or have the option to purchase equity in connection with the de-SPAC transaction. Analyst Report: Hyatt Hotels Corporation Hyatt is an operator of 1,162 owned (5% of total rooms) and. If the SPAC needs additional capital to pursue the business combination or pay its other expenses, the sponsor may loan additional funds to the SPAC. (go back), 2Other investments raise Investment Company Act considerations for the SPAC during the period before it completes its De-SPAC transaction, as well as risk issues around whether the trust account will have sufficient cash to return $10.00 per public share to public shareholders on a redemption or liquidation. Special Purpose Acquisition Company (SPAC) - Overview, How It Works Generally, a SPAC is formed by an experienced management team or a sponsor with nominal invested capital, typically translating into a ~20% interest in the SPAC (commonly known as founder shares). The sponsor and the SPACs officers and directors will waive redemption rights with respect to their founder shares (and any public shares they may purchase) in connection with the De-SPAC transaction or a charter amendment to permit an extended period to consummate the De-SPAC transaction, effectively agreeing to stay invested in the SPAC through the closing of the De-SPAC transaction or until liquidation. However, the transaction will need to be structured in a manner so that the SPAC does not become an investment company under the Investment Company Act of 1940. NEWCOURT SPAC SPONSOR LLC SC 13D Filing Concerning NCACU on 2021-10-22 The warrants essentially dilute any PIPE investors and any equity retained by the seller of the target business. Accounting Considerations for SPACs | BDO Knows SPACs | BDO SPAC formation and funding. The common stock included in the units sold to the public is sometimes classified as Class A common stock, with the sponsor purchasing Class B or Class F common stock. Often, existing investors in the SPAC will invest in the PIPE transaction, demonstrating their support for the de-SPAC business combination. To this end, most SPAC IPO prospectuses contain disclosure that says that the SPAC will only complete [a] business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires an interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940. Occasionally, readers of SPAC IPO prospectuses interpret this as a maximum size for a target business of two times the size of the SPAC. The warrant agreement also contains an obligation for the SPAC to register the issuance of public shares upon exercise of the public warrants. The promissory note covers any organizational or offering expenses until the SPAC can repay the loan from the proceeds of the IPO and sale of the founder warrants at the closing of the IPO. Both the Up-C and Up-SPAC structures allow the target to remain in pass-through entity form while also providing the target owners with easier access to future liquidity. With the exception of the cashless exercise feature and the non-redeemability, the founder warrants and public warrants have identical terms. The sponsor files the registration statement publicly at the time it addresses the comments of the SEC staff. SPAC Warrants: 8 Frequently Asked Questions - EisnerAmper Newcourt SPAC Sponsor LLC ("Sponsor") Sponsor is organized under the laws of the State of Delaware. Complete a blank sample electronically to save yourself time and money. If no De-SPAC transaction occurs, the deferred 3.5% discount is never paid to the underwriters and is used with the rest of the trust account balance to redeem the public shares. Corporate law of foreign jurisdictions, such as the Cayman Islands, is not as well developed as its Delaware analog, and Cayman Islands law notably does not expressly permit waiver of the corporate opportunity doctrine. The underwriter will play an additional, critical role in gauging the amount of redemptions by investors, and in arranging for the replacement of redeeming investors with others who support and are sanguine about the success of the proposed business combination transaction. SPACs enter into a letter agreement with their officers, directors and sponsor. Both, however, are 15% of the base offering size. (go back), 8For example, Please expand [your] disclosure, if accurate, to affirmatively confirm that no agent or representative of the registrant has taken any measure, direct or indirect, to locate a target business at any time, past or present. The sponsor of the SPAC will purchase warrants in an amount equal to the 2.0% upfront underwriting discount of the IPO (see below), plus funds to cover the offering expenses and expenses to find a target, with the aggregate price of the purchased warrants in most recent deals hovering between 2.3% to 3.0% of the gross IPO proceeds. 1. Most SPACs are formed as Delaware corporations, but several have been formed in foreign jurisdictions (most frequently the Cayman Islands, but occasionally the British Virgin Islands or the Marshall Islands). Much of the information in the Super 8-K will already have been included in the SPACs proxy statement or tender offer materials for the De-SPAC transaction, but the Super 8-K may require additional financial statement information for the target business. Special Purpose Acquisition Company Database | SPAC Research For more information on SPACs and the SPAC process, visit BDOs Special Purpose Acquisition Companies Resources page. Under stock exchange rules, the De-SPAC transaction must be with one or more target businesses or assets that together have an aggregate fair market value of at least 80% of the assets held in the trust account (excluding the deferred underwriting discount and taxes payable on the interest earned on the trust account) at the time of signing a definitive agreement for the De-SPAC transaction. By electing to use a basis step-up adjustment mechanism and a tax receivable agreement, the partners are paid for a portion of the public companys tax benefits in the form of an earnout. GlobeNewsWire - Fidus Investment Corp (FDUS) Fidus Investment ClearThink Capital's experience and expertise in SPACs spans three . Fund agreements may limit the ability of the investment manager to form a SPAC outside of an existing fund. Office Depot AlaskaFunding amounts range from $5,000 to $20,000, and Most SPACs list on the Nasdaq Capital Market, but there are those that list on the New York Stock Exchange. In cases where the forward purchase commitment comes from a private equity fund or other investor with a limited investment mandate, it may be appropriate to condition the obligation of the investor on the De-SPAC transaction satisfying the investment mandate of the investor. PDF Spac Transactions In The United States - Cravath Chase has a personality much like his best friend Cash. Such a business structure allows investors to contribute money towards a fund, which is then used to acquire one or more unspecified businesses to be identified after the IPO. If the SPAC is affiliated with a private equity group, the IPO prospectus will typically include disclosure indicating that members of the SPAC management team are employed by the private equity group, which is continuously made aware of potential business opportunities, one or more of which the SPAC may desire to pursue for a business combination. The founder warrants may be net settled (also referred to as a cashless exercise)meaning the holder is not required to deliver cash but is issued a number of shares of stock with a fair market value equal to the difference between the trading price of the stock and the warrant strike price. Joint Filing Agreement February 14th, 2023 SHUAA SPAC Sponsor I LLC Blank checks. The SPAC creates a transitory merger subsidiary that merges with and into the target, with the target surviving as a subsidiary of the public SPAC. Sponsor Forfeiture Agreement, dated August 15, 2022, by and - Justia In addition, each SPAC's warrant agreement amendment thresholds may vary. If a SPAC organized offshore decides to acquire a domestic target, the SPAC may have to redomicile in the United States. If you invest in a SPAC at the IPO stage, you are relying on the management team that formed the SPAC, often referred to as the sponsor (s), as the SPAC looks to acquire or combine with an operating company. No paper. For example, a former SPAC is not eligible to register offerings of securities pursuant to employee benefit plans on Form S-8 until at least 60 days after it has filed a Super 8-K. Nary a day goes by when we do not get an inquiry about SPACs. In part, this is attributable to the SEC staffs typically lengthy review of an IPO registration statement. We use cookies on this website to optimize user experience and site functionality and to give you the best possible experience. It Was Only a Matter of Time: SPAC Meets Business Divorce High redemption rates see SPACs relying on alternative financing The SPAC sponsors (or founders) are responsible for forming the SPAC entity, raising capital with investment groups, and taking the SPAC public. This primer provides you with an introduction to SPACs. In the rare event that a SPAC shareholder vote is not required, the SPAC will be required under its charter documents to conduct a tender offer to redeem the public shares and to file tender offer materials containing substantially the same information as would be required in a proxy statement. Mallard Point BulldogsMallard Pointe offers golfers a total practice For ease of reference, this primer refers to the shares and warrants included in the units sold to the public as the public shares and public warrants, and the shares and warrants sold to the sponsor as the founder shares and the founder warrants. The public shares and founder shares vote together as a single class and are usually identical except for certain anti-dilution adjustments described below. In addition to understanding the benefits of using a SPAC, it is important that SPAC sponsors and shareholders of target companies understand and plan for the federal income tax consequences associated with SPAC structures. [5] In addition to the founder warrants purchased at IPO, most SPACs contemplate that an additional $1.5 million of warrants can be issued to the sponsor at the De-SPAC transaction on conversion of any loans from the sponsor to the SPAC. The target stockholders rights to seek monetary damages for breaches by the SPAC or any financing failures are limited. SPAC sponsors typically own a 20 percent stake in the SPAC through founder shares in addition to warrants to purchase more shares. However, in recent years companies such as Whisker Seeker and Team Catfish have stepped up to the mark and filled a well-undeserved space the big name brands are lagging far behind. The sponsor team will consist of the sponsor, a management team and the directors of the SPAC. The answer is provided below. After the staff has signed off on the public filing, the sponsor can move quickly to have the registration statement declared effective, most often with limited amendments. PDF 077777 116988007v3 GPCA SPAC Webinar Presentation (12.2.20) Stock exchange rules permit a period as long as three years, but most SPACs designate 24 months from the IPO closing as the period. The taxable amount is the FMV of the boot received. The sponsors may also receive warrants to purchase additional SPAC shares. Servicemaster Fm ApplicationAt ServiceMaster Facilities Maintenance, we provide both one-time and routine cleaning services for your commercial facility in Memphis and the surrounding . Therefore, gain may be avoided if the shares are sold immediately after the exchange. SPACs go through the typical IPO process, although the sponsors. The target companys shareholders exchange stock constituting control of the target company for voting stock of the SPAC; At least 80% of the total consideration paid to the target companys shareholders is SPAC voting stock; and. The audited financial statements of the target business in the proxy statement or tender offer materials may be audited under the American Institute of Certified Public Accountants (AICPA) rules, but the Super 8-K (discussed below) is required to have three years of audited financial statements of the target business audited in compliance with the Public Company Accounting Oversight Board (the PCAOB) rules. Post-closing, the surviving company will file with the SEC a Super 8-K, to put into the public record any information that was not contained in the proxy statement but that is required to allow affiliates to sell their shares under Rule 144. Offering expenses, including the up-front portion of the underwriting discount, and a modest amount of working capital will be funded by the entity or management team that forms the SPAC (the sponsor). The directors will be chosen on the basis of their experience in M&A transactions and deal sourcing. The warrants become exercisable on the later of (i) 30 days after the De-SPAC transaction and (ii) the twelve-month anniversary of the SPAC IPO. COVID-19 national emergency and public health emergency both end May 11, 2023. These warrants, which are referred to as the private placement warrants, have terms that are substantially identical to the warrants issued in the IPO, and are commonly purchased by the sponsor at around $1.00 or $1.50 per whole warrant in a private placement that closes concurrently with the closing of the IPO. Recently, the most common structure has been that the units sold in the IPO would include a half warrant, although one-third of a warrant is more common in larger IPOs.