Special purpose acquisition companies, commonly known as SPACs, have been around for decades but began to soar in popularity in 2020. 2021 is seeing even more activity by SPACs, which raised more money in the first three months of this year than in all of 2020. In February, SPACs raised $3.76 for every dollar that was raised in IPO. Why have these “blank check companies” become so popular, and what does it mean for you, as an employee, if your company participates in a SPAC merger?
A special purpose acquisition company doesn’t sell any product or service of its own. Rather, it exists for the special purpose of acquiring another company. It does this by raising capital via an IPO. A SPAC’s founders are typically investors with expertise in a particular field; investors in a SPAC are essentially betting on the founders’ expertise and industry connections to make a favorable deal. Before it goes through, however, the merger must be approved by shareholders. If a SPAC fails to get shareholder approval for a merger within two years of its creation, then it must return its shareholders’ investments.
Back in the 1980s, SPACs had a shady reputation. Fraud was rampant, and many investors lost money to overvalued insider deals or outright theft. Today, however, SPACs must follow rules to prevent such abuses, including registering with the SEC, depositing investor funds into an escrow account, and returning money to investors in the absence of a shareholder-approved merger.
A traditional IPO is a long, complicated, and costly endeavor. It typically involves multiple rounds of funding and “investor roadshows,” during which executives travel the nation or globe, meeting with potential investors to generate funding. The IPO process can take up to 18 months to complete.
When a company is acquired by a SPAC, however, the process is streamlined and simplified. Rather than presenting to many potential investors around the world, executives can focus on dealing directly with the SPAC founders. The global pandemic, no doubt, made this alternative to the traditional roadshow much more attractive. Additionally, the target company is required to make fewer disclosures for a SPAC acquisition than for a traditional IPO, and the process can be completed in just two to three months.
Often, a SPAC will purchase a certain percentage of shares in the target company from existing shareholders. This contrasts with an IPO, in which all shares offered on the public market are newly issued. As a result, employees of a company that merges with a SPAC may be able to partially cash in as soon as the merger is complete, while IPO employees must wait until the lockup period expires to sell any of their shares.
Aside from any shares that the SPAC purchases as part of the merger deal, you will not be allowed to sell your company stock for a specified period after the merger. While a post-IPO lockup commonly lasts six months, the lockup period following a SPAC merger can last up to a year.
When the merger is complete, you’ll receive a specified number of shares in the publicly listed SPAC in exchange for your existing company shares. The SPAC process gives investors and the target company the opportunity to gain a more complete understanding of how to appropriately value the company. As a result, SPAC shareholders may experience less price volatility than traditional pre-IPO investors when public trading begins.
It is possible that a SPAC merger will cause unvested shares to immediately vest, which can have dramatic tax consequences. It’s important to work with a trusted tax advisor who has experience with the IPO and SPAC merger processes so you can anticipate taxable events and plan appropriately, mitigating tax liability where possible and putting a plan in place to pay tax bills as they come due.
There are many factors to consider when planning for your company’s liquidity event. Not only will you need expert guidance to navigate the complex tax implications of your company’s SPAC merger, but you will also want the assistance of a trusted financial and investment advisor who has specific experience and expertise in the process. Fiduciary advisors are bound by law to act according to their clients’ best interests. By working with a fiduciary, you ensure that your financial well-being is what’s guiding their advice—not their commissions.
A wealth manager can provide comprehensive services to help you manage all the financial details of your company’s merger. A wealth manager with IPO/SPAC expertise can
The fiduciary advisors at WRP are experts at helping executives and employees navigate their companies’ liquidity events. For more wealth management Insights, read our blog!