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Message: <blockquote data-quote="Dheepa" data-source="post: 70728" data-attributes="member: 1572">Hi all! Welcome again to this week’s commercial discussion. For anyone that’s new to this topic here are <a href="https://www.youtube.com/watch?v=okyT7KfnFrI" target="_blank">two</a> <a href="https://www.youtube.com/watch?v=8ECMp9ut_yg" target="_blank">things</a> to watch to get to grips with it (Thanks to [USER=1999]@Raam[/USER] for this). As always feel free to jump in with your own questions or thoughts!So I think there are three main things you should be able to discuss about SPACs:1. Why are SPACs growing in popularity?The traditional reason for SPACs being more advantageous for companies seeking to list is they bypass the issues involved with pricing shares in a traditional IPO listing. The book building process is where underwriters (investment banks) go on their infamous road shows to collate bids on the prices that institutional investors would be willing to pay for shares. However, investment banks tend to set prices slightly below the rate that gets calculated from those bids. This can be frustrating for the founders and other angel investors with stakes in the company because their returns from the IPO are often far less than the company’s actual worth. With SPACs, the price for the company is set through private negotiations offering more certainty.Certainty is especially important for companies seeking to list right now because of all the COVID induced volatility in the share market. Even without COVID, investor favourites like <a href="https://www.investors.com/news/technology/uber-stock-uber-ipo-lyft-stock/" target="_blank">Uber</a> performed terribly on its first day of trading due to trade war escalation on the day. So it’s easy to see why a whole host of companies (most notably<a href="https://www.cnbc.com/2020/03/14/coronavirus-and-market-volatility-shuts-down-the-ipo-market-for-potential-listings-like-airbnb.html" target="_blank"> Airbnb</a>) delayed listings last year when there was really no telling how the market would perform on any given day. Another more current reason for the increased popularity is (and you’re probably tired of hearing about this one now), low interest rates. PE firms are looking for more and more investment opportunities that utilise their “dry powder” and there’s an increased appetite for the greater returns their investments offer.2. Are SPACs a good thing?There a couple of (in my opinion) good reasons for distrusting SPACs.The IPO process is a lengthy one for a reason. Due diligence allows investors to weed out any issues beforehand and disclosure requirements means that any issues that can’t be resolved are ones investors deem worth taking. SPACs on the other hand benefit from neither of these precautions leaving the possibility that investors are paying for revenues or assets that don’t actually exist. See the allegations that <a href="https://edition.cnn.com/2020/09/11/business/nikola-motor-stock-hindenburg-short-seller-allegations/index.html" target="_blank">Nikola’s</a> chairman exaggerated the capabilities of its leading product and <a href="https://www.prnewswire.com/news-releases/akazoo-special-committee-determines-former-akazoo-management-and-associates-participated-in-sophisticated-multi-year-fraud-301063980.html" target="_blank">Akazoo</a> that flat out falsified its company’s accounts.Secondly, it’s also important to bear in mind that an investment in a SPAC is not even really an investment in a potentially lucrative company. Rather it is an investment in the capabilities of the leading individuals and PE firms behind the SPAC. It is blind faith placed in the hands of people with not much to lose even if the SPAC fails. Then there’s the issue of the ‘promote’ – the 20% stake that sponsors get in the target company, which leave investors 20% short of the actual share capital that their money should have given them. This is what has led to dissenters saying SPAC’s are just another clever way for executives to by pass accountability created by listing regulations and better line their own pockets.Thirdly, any value created for shareholders through the SPAC is also heavily subject to dilution inherent in the SPAC structure, either from the aforementioned promote or from the redemption of shares (i.e. sale of the shares back to the company) by some shareholders (note: these shareholders still hold on to their warrants i.e. option to purchase the share at a pre-determined price should the value go up). This is the flipside to the money back feature of SPACs that allow shareholders to leave with no losses if they disagree with the target being acquired. Remaining shareholders bear the cost of both of the redemption and the ‘promote’ especially if the SPAC goes on to perform poorly post-merger. (I had a lot of time today and came across this <a href="https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/" target="_blank">study</a> that informed some of the things I mention here, it’s very technical but worth a read if math doesn’t stress you out) The high cost of an SPAC listing really begs the question of its worthwhile at all for shareholders. The recent changes in direct listing rules on the NYSE now allows for companies to raise fresh money even through direct listings. This seems to be a far less costly, and a more tried and tested way to list. (I think you’d get bonus points if you could discuss Coinbase’s recent choice for a direct listing here)3. Listing rules (and how does the SPAC boom affect law firms more broadly)The SPAC boom in the US only exists because its listing rules facilitate it. Here in the UK, trading of any listed company is suspended upon announcement of a merger (meaning investors lose the ability to dip out if they disagree with the choice of target company). There are also strict rules against disseminating forward looking financial information. Considering that most tech companies (the primary target of SPACs thus far) are valued so highly for their potential rather than historical performance, this seems to take all the benefit out of the better pricing that allegedly comes with an SPAC listing. As the original article already mentions, if the FCA does make changes to these requirements, there will be a flurry of advisory work for capital markets lawyers helping clients navigate these rules, in addition to the inevitable actual SPAC deal/listing work.I’m personally more intrigued by how SPAC’s are going to be structured to curtail some of the issues I discussed above on high costs and scepticism around the promote provisions. Bill Ackman alleges that his SPAC has the solution – the promote does not materialise until after the stock rises 20% and any dilution to ordinary shareholders from redemption will be capped at 6%. I’m interested to see if the market responds well to this and if not, will lawyers need to come up with better ways to structure the warrants and share rights arising out of these listings?</blockquote>

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