BREAKING DOWN THE SPAC SURGE: A REVIEW OF KEY TRENDS & ISSUES DEFINING THE PHENOMENON - Mintz
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BREAKING DOWN
THE SPAC SURGE:
A REVIEW OF KEY TRENDS
& ISSUES DEFINING THE
PHENOMENON// FOREWORD
Special purpose acquisition
companies (SPACs) continue to
dominate headlines in the financial $124.7B
press, and for good reason, as they
consistently outstrip traditional IPO Nearly $125 billion has been raised by SPACs
registrations after a staggering surge in the past 14 months in the US alone
of formation in the past 14 months.
But record formation rates are no
longer the primary finding—the actual
closure of mergers or acquisitions powder, and a large number
(M&A) by this massive pool of capital of potential target private
earmarked for acquisitive purposes, companies. Contents
as well as ongoing and incipient
evolution in the SPAC model itself, are • Although performance remains
now key topics of discussion. Analysis the ultimate arbiter for the
Infographic 3
of datasets and research have longevity and utility of the SPAC
uncovered the following key findings: model, its increased usage by
sustainability-focused businesses
• With nearly $125 billion raised and ongoing evolution implies
Fundraising 4-5
across hundreds of SPACs over an establishment of SPACs as a
the past 14 months, the extent potentially better-suited avenue
of the fundraising frenzy is of liquidity and capital access
undeniable. for capital-intensive, longer-term M&A 6-8
company models.
• 2020 saw 123 mergers with
SPACs announced or closed • As competition intensifies,
Looking
for an aggregate $59.3 billion, important considerations for 9
ahead
representing a significant portion SPAC sponsors and targets
of all launched SPACs over the include flexibility in bases of
past few years. valuation, agreeing to a form of
merger agreement in the letter of
• Multiple factors explain the rise intent (LOI), and operating control
in SPACs, including pent-up and governance alignment.
investor demand, record asset
prices across much of equities,
significant private investor dry
2 B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon// INFOGRAPHIC
SPAC process
1 Formation
Founding investors form a SPAC, paying
536% $1.5T a nominal amount for an equity stake
of approximately 20% post-IPO, often
lending money to fund expenses and
purchasing private placement warrants
With $74.2 billion raised Over $1.5 trillion of or units at time of IPO.
by 245 SPACs in 2020, private investment
that tally of aggregate dry powder is helping
proceeds represents a fuel investor demand 2 IPO
staggering year-over- for exposure to and
The SPAC entity raises capital by issuing
year increase. launches of SPACs. units comprised of common shares and
warrants (or fractions of warrants), with
proceeds held in a trust until the target
SPACs
is acquired or the SPAC expires. Post-
IPO, units are separated into shares of
common stock and tradable warrants.
Can be faster, but they are no less complex than
a traditional IPO, requiring audits under PCAOB 3 Search
standards, a registration statement/proxy statement
with IPO-like disclosure, a Super 8-K and various Similar to a traditional M&A process,
sponsors then vet potential targets
SEC filings post-merger, all on an accelerated
on an accelerated timeline. Once a
timeline. target is identified, closing conditions
often require a simultaneous private
investment in public equity (PIPE) to
close the merger.
4 Vote
Founders vote their 20% interest in favor
of a transaction, but other shareholders
must also vote in favor.
$50.5B 123 5 M&A
2021’s first two months A significant volume of Should an affirmative vote be obtained
have already seen over de-SPACs were and the other closing conditions met,
$50 billion raised by announced or closed in the target company and the SPAC
close to 200 SPACs. 2020. complete the business combination and
become a publicly traded entity.
Sources: Deloitte, PwC, Mintz
B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon 3// FUNDRAISING
The SPAC fundraising frenzy While the intensity and acceleration of TOP 20 SPACS BY SIZE*
the frenzy is evident, its many drivers
2020 was unprecedented in many are not necessarily as well-established.
ways, but the sheer bewildering variety Company name Deal size ($M)
of financial markets phenomena that Unpacking the drivers of the SPAC Pershing Square Tontine
$4,000.0
gripped the industry stands prominent. boom: Investor demand Holdings
Perhaps chief among these was the Soaring Eagle
$1,500.0
SPAC fundraising frenzy. Although We can attribute any explosive Acquisition
invented decades ago, SPACs were phenomenon, such as the rise in SPACs,
Churchill Capital Corp VII $1,200.0
quite rare since their inception, with first to a demand curve sliding up a
barely a handful closed per year nearly limitless supply trendline. In the Social Capital
Hedosophia Holdings $1,000.0
throughout the 2010s. However, modest case of 2020, a majority of analyses
Corp. VI
growth from 2017 and 2019 swelled into point toward the unique shock of the
Jaws Mustang
a true exponential surge in 2020, with COVID-19 pandemic—in economic, $900.0
Acquisition
hardly any slowdown in 2021 through market, and policy terms—as ultimately
Thoma Bravo
late February. 245 SPACs completed encouraging record rises in equity $900.0
Advantage
their IPOs in the US last year, raising just markets due to an unprecedented
Ares Acquisition $870.0
over $74 billion in proceeds—that latter combination of fiscal stimuli and
figure represents a 536% year-over- monetary policies. Assets are expensive
Ajax I $750.0
year increase. But 2021 may outdo even nearly across the board, so both retail
that staggering sum, with $50.5 billion and institutional investors are looking Apollo Strategic Growth
$750.0
raised by 178 vehicles so far in the year, for any potential arbitrage or source Capital
already 68% and nearly 73% of 2020 of value, even if speculative, and the Compute Health
$750.0
Acquisition
tallies, respectively. specific features of SPACs can offer
a suitable destination. However, other CONX Corp $750.0
CC Neuberger Principal
SPAC REGISTRATION ACTIVITY Holdings II
$720.0
$80 300 Cohn Robbins Holdings $720.0
$70 GS Acquisition Holdings
250 $700.0
Corp II
$60
Apollo Strategic Growth
$600.0
200 Capital
$50
Austerlitz Acquisition I $600.0
$40 150
$30 Avanti Acquisition $600.0
100
$20
Pontem Corporation $600.0
50
$10
Bluescape
$0 0 Opportunities $575.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021* Acquisition Corp.
Total raised ($B) Exit size ($B) Exit count Bridgetown Holdings $550.0
Source: PitchBook | Geography: US Source: PitchBook | Geography: US
*As of February 26, 2021 *As of February 26, 2021
4 B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the PhenomenonAVERAGE & MEDIAN CAPITAL RAISED ($M) AVERAGE & MEDIAN PRE-VALUATION ($M) BY SPAC
BY SPAC PRIOR TO OFFERING
$350 $90
$302.7
$300 $283.8 $80
$70.8
$250.0 $70 $65.0
$250
$240.0 $60
$60.0 $60.0
$200 $50
$150 $40
$30
$100
$20
$50
$10
$0 $0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021*
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021*
Average Median Average Median
Source: PitchBook | Geography: US Source: PitchBook | Geography: US
*As of February 26, 2021 *As of February 26, 2021
tailwinds on the investor demand change, there has been a marked of valuation and closing are broadly
side have also contributed to SPACs’ proliferation of companies in sectors favorable, especially relative to the
popularity. PE and VC dry powder is and business models that tend to duration of an IPO roadshow and the
at or near all-time highs, the former be capital-intensive. These typically unpredictability of the IPO market. On
exceeding $1.2 trillion and the latter also involve longer timelines to reach the flip side, although speed is of the
$250 billion, both as of mid-2020. product-market fit and even to post essence during a SPAC, they do not
Given recent market volatility, firms improving financials (for example, necessarily close much faster or cost
across the private investment manager in sustainable mobility, renewable less than a traditional IPO. However, via
spectrum are seeking to deploy capital energy, or biotechnology). In short, the PIPE that is often employed to raise
in more certain opportunities and look SPAC fundraising is also predicated additional capital post-identification
to them as an exit route for portfolio on the reality of a significant supply of of a target, more investors can gain
companies. potentially relevant acquisition targets. additional exposure to a potentially
Given the maturation of private financial valuable merger. As a result, a well-
Unpacking the drivers of the SPAC markets, experienced management structured SPAC can potentially raise
boom: Supply and traits teams are now more often recruited more capital than a traditional IPO.
to SPACs or raising them of their own The ability to pre-set valuations for
Thanks to the rise of private volition, which has heightened the debuts on public markets can be
financial markets over the 2010s, appeal of the route for many private quite attractive for companies as well.
an unprecedented number of more companies. Additional advantages, primarily for
mature businesses have stayed private. early-stage companies, include access
In addition, against the backdrop Lastly, the mechanisms and traits of to capital at lower cost than available
of significant policy changes and SPACs represent considerable appeal. in private markets and marketable
popularization of sustainability The speed often inherent in the securities that can be used for accretive
initiatives to combat climate SPAC timeline and greater certainty acquisitions and employee incentives.
B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon 5// M&A
Initial success in de-SPAC activity— DE-SPAC ACTIVITY (ANNOUNCED AND CLOSED)
but ultimate verdicts are yet to be
rendered $70 140
By normal terms, SPACs have a $60 120
predetermined amount of time to
$50 100
find a target, often a maximum of
two years. However, it does not follow $40 80
that the blank-check shell companies
that constitute formed SPACs will $30 60
take that full duration of time to find
a target company. In fact, given the $20 40
volume of reporting and degree of
$10 20
complexity in completing the merger
once the target has been identified, it $0 0
is in the sponsor’s best interest to find 2019 2020 2021*
a target swiftly. Many have been able Last financing size ($B) Acquisition count
to do so; PitchBook data that includes
Source: PitchBook | Geography: US
both announced and completed de- *As of February 26, 2021
SPACs tallies 123 mergers in 2020 for
a tentative aggregate of $59.3 billion. DE-SPACS (#) BY ACQUIRER SECTOR (CLOSED)*
Moreover, 61 have already occurred
in the first two months of 2021, for a
total of $26.9 billion. Those figures
represent healthy proportions of the 4.9% Healthcare
overall SPAC fundraising volume, by 8.2% 20.5%
B2C
count, although a considerable portion
of blank-check companies remain in B2B
the market for prospective targets. 14.8%
Interestingly, completed de-SPAC Financial services
mergers span a broader array of
IT
sectors than may be supposed, though 19.7%
a plurality is concentrated in healthcare 14.8% Materials and resources
and B2C. Much as biotechs have
Energy
utilized traditional IPOs in a unique 17.2%
fashion given their business models,
more sustainability-focused, early-stage Source: PitchBook | Geography: US
companies are considering a SPAC *As of February 26, 2021
as the best route to the public capital
markets to enable their potentially
prolonged timelines of growth.
6 B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the PhenomenonGranted, sponsors incur additional risk VC ACTIVITY IN COMPANIES PRIOR TO DE-SPAC ACTIVITY
by targeting such companies as they
are often pre-revenue, and experienced $2.5 18
operators with sector-specific expertise
16
are that much more critical. Hence, a
$2.0 14
blend of de-SPAC mergers between
early-stage companies and more 12
mature, potentially PE-backed portfolio $1.5
10
companies will likely continue going
8
forward. $1.0
6
A completed or agreed-upon merger 4
$0.5
does not represent a final verdict
2
of success for the sponsor or target
$0.0 0
company. Although it represents an
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
important step for a given business, the
Deal value ($B) Deal count
company’s performance by traditional
public equity measures, such as Source: PitchBook | Geography: US
*As of February 26, 2021
trading performance, will ultimately
characterize the business’s success over
the coming years. AVERAGE AND MEDIAN FINANCING SIZES ($M) OF ANNOUNCED OR
CLOSED DE-SPAC ACTIVITY
Contextualizing de-SPAC activity:
Potential premia and litigation? 2019 2020 2021*
Average $1,065.0 $1,289.2 $1,923.6
The extent to which SPACs are
increasingly targeting emerging, pre- Median $672.3 $647.0 $1,580.0
revenue companies can be seen in
Source: PitchBook | Geography: US
overall investment levels from both
*As of February 26, 2021
PE and VC firms of such businesses Note: Values for 2019 and 2021 are based on non-normative sample sizes.
prior to completed mergers with
SPACs. Just 14 financings for a total their specific business model or sector SPAC sponsor and other investors. In
of $1.3 billion occurred in 2020, the focus. Strikingly, when comparing the addition, overall median M&A sizes
second-highest tally of aggregate median de-SPAC size to the median in the US are skewed downward by
financing value of the past 10 years. size of overall M&A in the US, the de- the volume of small to medium-sized
That represents an average of $89.4 SPAC events are several times larger. businesses that get acquired. With that
million per venture financing round. As impressive as these sums may be, said, the disparity hints at the potential
PE investment volume is minuscule they can be attributed to the unique for significant premia occurring across
by comparison, with only 2016 seeing dynamics of a de-SPAC merger; de-SPAC activity. This trend points
an outlier five PE deals for an outlier PIPEs provide an additional cash to significant competition for private
$11.4 billion. Accordingly, although a boost to secure the acquisition, and targets by SPACs, not just by offering
handful of such businesses may attract the companies that have been taken more favorable valuations, but also
significant PE or venture infusions of public thus far represent significant by amending terms—for example,
capital, many are emergent due to growth potential according to the decreasing the number of founder
B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon 7shares and/or private placement Like the majority of M&A transactions, SEC interest. In 2020, the SEC
warrants as part of the merger SPACs are already attracting began focusing on the adequacy of
agreement. Such competition will likely shareholder claims challenging the disclosures in both SPAC IPOs and
intensify given the ongoing flood of adequacy of disclosure in SEC filings de-SPAC transactions. Former SEC
capital into SPAC formation. related to the combinations, either Chairman Clayton twice discussed his
via breach of fiduciary claims or concerns on CNBC in the fall of 2020,
Given the explosion of SPAC IPOs and alleged violation of Section 14 of the noting that the SEC wanted to ensure
follow-on de-SPAC transactions, we Securities Exchange Act of 1934. While that all interests that might influence
anticipate a corresponding uptick in such actions usually are settled via SPAC sponsors, directors, officers, and
SPAC-related litigation. Specifically, supplemental disclosure and a payment other insiders are clearly disclosed to
we envision a number of potential of plaintiff’s attorney fees, there is no retail investors. To this end, the SEC’s
litigation and regulatory challenges. For guarantee that some plaintiffs will not Division of Corporate Finance recently
example, SPAC officers and directors elect to continue litigating post-closing. introduced CF Disclosure Guidance:
could face potential litigation concerning Topic No. 11 on December 22, 2020,
the discharge of their fiduciary duties In addition, we already are seeing setting forth the SEC’s views regarding
in connection with the selection of post-closing class actions alleging information that SPACs should disclose
potential acquisition targets or the violations of Section 10(b) of the in connection with both IPOs and
failure to achieve a combination by Securities Exchange Act and Rule de-SPAC transactions. Specifically,
the end of the target period. While the 10b-5 for allegedly misleading pre- Topic 11 encourages robust disclosure
business judgment rule likely would offer closing representations. Some recent regarding potential conflicts, including:
a defense to such claims for directors, examples of such litigation include: (1) insiders’ fiduciary obligations to
and a SPAC investor’s redemption rights Salem v. Nikola Corp. et al., No. 2:20-cv- entities other than the SPAC; (2) any
would reduce any potential damages, 04354-GRB-SIL (E.D.N.Y. 2020) (claims financial incentives for insiders to
we expect to see some creative pleading for violation of Section 10(b), Section complete a business combination
by plaintiffs’ counsel. Following a 20(a), and Rule 10b-5); In re Akazoo (including losses that may be sustained
successful de-SPAC, the SPAC directors S.A. Sec. Litig., No. 1:20-cv-01900-BMC if a combination is not completed); (3)
could also face duty of loyalty claims (E.D.N.Y. 2020) (claims include violation how a sponsor’s security ownership
from SPAC shareholders questioning of Section 10(b), Section 14(a), Section may differ from the securities sold in
whether the directors acted in self- 20(a), and Rule 10b-5); Welch v. Meaux the IPO; and (4) insider compensation
interest in promoting the combination. et al., No. 2:19-CV-01260-TAD-KK (2019, that may be contingent upon
While post-merger litigation is not W.D. La.) (claims for violation of Section completion of a business combination.
unique to the SPAC world, the high 10(b), Section 20(a), and Rule 10b-5); Perhaps in response to the SEC’s
valuations attributed to SPAC deals Pitman v. Immunovant, Inc., et al., No. guidance, The New York Times recently
coupled with post-SPAC share 1:21-cv-00918 (E.D.N.Y. 2021) (claims noted that SPAC sponsors are taking
price declines could make de-SPAC for violation of Section 10(b), Section it upon themselves to realign their
companies targets for litigation. 20(a), and Rule 10b-5); and Kaul v. interests with those of the SPAC
Clover Health Investments, Corp. et IPO investors. We anticipate that
SPAC combinations also may prompt al., No. 3:21-cv-00101 (M.D. Tenn. 2021) the SEC will continue to maintain a
litigation resulting from the target (claims include violation of Section heightened focus on SPAC disclosures,
shareholder’s exercise of appraisal 10(b), Section 20(a), and Rule 10b-5). including risk disclosures, given the
rights under state law. A successful current popularity of SPACs with retail
appraisal challenge could result in Not surprisingly, the recent explosion investors.
significant additional deal and litigation in SPACs has engendered heightened
costs.
8 B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon// LOOKING AHEAD
Are SPACs here to stay? the additional filings required, such investors on the open market. Thus,
pressures will also likely induce swifter agency risk can arise given that
Given the profundity of capital and changes overall. These adaptations inherent incentive to complete the
prominence of firms engaging in should ideally address not only points initial business acquisition even if
SPACs on both the sponsor and target of contention but also key areas of risk. terms are not quite as favorable as
side, it would seem so. However, there Some of the primary focus areas: they could be. However, given the
are important nuances that must be growing sophistication of PE- or
mapped out. Although the odds of 1. Control: Control of the operating VC-backed firms that could be
performance for many companies that company can often become a point sellers in the de-SPAC combination,
have gone public via SPAC have likely of negotiation. Given that current varying risk exposures may be
improved given the much higher rate of SPAC models give the sponsor amended over time.
experienced executives and sponsors and other founder shareholders
involved with the SPAC formation and around 20% interest, the balance 4. Timelines: Two years is currently
post-close operations of the de-SPAC of ownership must be clearly the typical period for a SPAC to
business, future performance will have understood. Especially as PE and find a business and take it public.
to align with the overall market. Past VC firms consider taking portfolio However, as competition intensifies
studies have indicated that post-SPAC companies public via SPACs, their and performance of higher-
companies exhibit mixed results at exit plans should address this type quality businesses begins bearing
best—companies undertaking mergers of scenario and how post-SPAC out the SPAC model overall,
with SPACs going forward will have merger controlling interests may variance in that timeline will likely
to dispel this narrative with robust change. increase, as sponsors will opt for a
outcomes. Even with other factors longer period—three years is the
in play, the overall performance by 2. Merger terms: LOIs do not maximum allowable—to give more
post-SPAC merger businesses will always address the full intricacies flexibility and potential time to
solidify the SPAC as a new mechanism of valuations—for example, identify better prospects.
for liquidity for private companies considering dilution of shares,
and additional means of exposure for underlying options, and warrants. All in all, the appealing features of
investors. Accordingly, the LOI should be a SPAC are what also contribute to
sufficiently detailed to strike a its sheer degree of complexity, as it
Key risks that remain and the eventual fair compromise between basing blends elements of a merger, PIPEs, and
evolution of SPACs valuations on outstanding shares IPOs together in a novel, potentially
and vested options that are in the valuable mechanism for all parties
Should SPACs prove less of a one-time money. In addition, a publicly filed concerned. With careful preparation
boom, we will likely see an evolution merger agreement from another and openness to eventual adaptation,
in the SPAC model. Some changes transaction can be identified sponsors, service providers, and target
due to competition have already been at the LOI stage to streamline companies can collaborate to utilize
observed, whether it is adjusting negotiations. the SPAC process to yield a successful
warrants’ fractionality, eliminating listing and set up a company for robust
warrants entirely, or modifying 3. Risk exposure: As the SEC has performance.
valuations to be more favorable outlined, sponsors generally
for the target company. Given the purchase equity in the SPAC
complexity of the SPAC process, the at more favorable terms than
rigor necessitated by its speed, and investors in the IPO or subsequent
B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon 9MINTZ BUILT ON EXCELLENCE, DRIVEN BY CHANGE Mintz is a leading US law firm with a preeminent Securities & Capital Markets practice. Our team has been at the forefront of SPAC transactions and we are recognized as a pioneering firm in this space. Mintz handled the first New York Stock Exchange SPAC transaction, advised on the first deal with $100 million+ committed PIPE financing, and created AIMSPACs. In recent months, our team has worked on many SPAC deals for multibillion-dollar value companies, and our deep industry experience in life sciences, health care, energy & sustainability, and technology is aligned with the sectors where SPACs are most prominent. Mintz’s SPAC practice is interdisciplinary and includes attorneys from our securities litigation team who regularly advise on corporate disclosures, financial projections, redemption of SPAC shares, and risks related to the de-SPAC process. Learn more about Mintz and the firm’s SPAC practice. METHODOLOGY SPAC fundraising refers to the actual initial public offering of the blank-check shell company. For de-SPAC activity, i.e. the reverse merger completed with the target company by the blank-check shell company, both completed and incomplete transactions were included and are denoted as such. Given the majority of SPACs are target sector-agnostic, only completed de-SPAC activity was able to be depicted by the target company’s primary sector as tagged in the PitchBook Platform. 10 B reaking Down the S PAC Surge: A Review of Key Trends & Issues Defining the Phenomenon
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