Planting Seeds: Acorns Goes Public via a SPAC​


By Robyn Ma​

The Story

Investment app Acorns has announced plans to go public by merging with a special purpose acquisition company, otherwise known as a SPAC (CNBC). The app will be valued at $2.2 billion, more than double its private valuation from 2019 (Reuters). Several institutional investors will sponsor this deal - with the app previously being endorsed by celebrity investors like Ashton Kutcher.

SPACs skip the traditional lengthy and expensive process of listing on a stock exchange. Otherwise known as blank check companies, they list with the sole purpose of acquiring private companies and taking them public, usually within a two-year horizon (CNBC). Investors therefore invest without knowing which private company the SPAC will target. Instead, they are betting on the SPAC’s sponsors’ ability to identify and merge with a successful company within the two-year window.

What It Means For Businesses and Law Firms

SPAC deals have experienced a “nearly sixfold increase” this year, from historic levels (CNBC). This was particularly concentrated in the US, which saw nearly 250 SPACs in 2020, compared to only 13 in 2016 (Investment Week).

SPACs are preferred over traditional IPOs because they are less regulated - however, this SPAC boom has prompted scrutiny from regulators (Lawyer Monthly). The recently appointed chairman of the US Securities and Exchange Commission (SEC), Gary Gensler, is expected to announce changes to SPAC regulations (CNBC).

Regulators are hoping to add disclosure requirements to this form of speculative trading, especially given the recent fallout from some retail investors who invested in GameStop.

Though essentially betting without “valuation or an actual business”, retail investors “represented 46% of trading volume in SPAC” (CNBC). Moreover, as retail investors, unlike institutional investors, can only purchase SPAC shares on the open market; they end up missing out on the first-day jump, and may lose money (CNBC). The disclosure of information, such as financial projections, is therefore crucial (Lawyer Monthly). However, unlike traditional IPOs, SPACs permit market projections. Gensler is expected to restrict safe-harbour protections “for forward-looking statements granted by SPACs”, so companies become liable for failing to meet financial guidance provided during the acquisition (S&P Global).

There are also questions over how SPAC sponsors raise money. They use warrants, which represent a “partial share of the company once the SPAC merges” and are redeemable in the future (S&P Global). The SEC is looking to categorise warrants as liabilities, and companies are now scrambling to reassess their accounting and the “perceived benefit of going public through a SPAC” (Crunchbase).

Finally, there is an imbalance between the number of blank-check companies and private companies ready to go public, with SPAC firms chasing a limited number of start-ups. This gives the latter more “bargaining power” and allows “them to play investors off against one another to get a better valuation” (CNBC). Valuations of target companies may therefore be rising and, in failing to reflect the actual value of these companies, investors are potentially investing in “lower-quality companies” (CNBC).

Law firms have begun issuing their own guidance and opinions regarding the SPAC boom. Solicitors are involved in SPAC formation and its public listing. For instance, Clifford Chance recently advised HH&L Acquisition Co, a SPAC, on its creation and subsequent IPO and listing on the NYSE (Clifford Chance). Lawyers will be on hand to draft due diligence documents, and to ensure continuous compliance with changing regulations.

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