SPACs gained traction in Canada in the first half of 2015.
There has been a growing interest in Canada in publicly traded Special-Purpose Acquisition Corporations (SPACs) in the recent year. Although new to Canada, SPACs were first launched in the US in the late 1990s. While activity lagged for a period of time in the US, the marketplace for SPACs picked up again in 2003 with the average size of the offerings increasing over the next five years.
SPACs gained traction in Canada in the first half of 2015. In fact, in the past year, we have seen five Toronto Stock Exchange (TSX) listings totaling over $1 billion in capital raised using the SPAC program.
For those less familiar with the concept, a SPAC is an alternative investment vehicle for listing on the TSX. It is a collective investment structure that allows public stock market investors to potentially invest in private equity type transactions; particularly leveraged buyouts.
Seed funding for SPACs is generated by sponsors who are typically a small group of industry-experienced managers and financiers with a history of successful transactions. The major appeal of a SPAC versus a traditional initial public offering (IPO) is that it provides a platform for those sponsors to get listed on the TSX within a relatively short time frame at a much lower cost.
A SPAC acts as a shell corporation that contains no commercial operations or assets other than cash raised from founder shares or seed capital. The seed capital is used to prepare an IPO prospectus document to file with the applicable securities regulator and apply for listing on the TSX.
TSX SPAC requirements include:
Of the money raised from the market, 90% of gross proceeds (which must include 50% of the underwriter’s commissions) from the IPO must be put in an escrow account and not be used for any other purpose than to identify and complete qualifying acquisitions (typically private businesses).
SPACs become reporting issuers as a result of their IPO and are fully regulated by the relevant provincial securities commissions as well as TSX SPAC rules.
Once a SPAC is launched on the TSX, the TSX rules allow for up to three years to find and complete a qualifying transaction. If the SPAC fails to complete a qualifying acquisition within the permitted time frame, the escrowed funds are distributed pro-rata to the public security holders.
SPACs provide an opportunity for the public to co-invest with sophisticated, highly experienced managers and financiers with a track record of success. A key advantage is their investment is protected through the escrow fund restriction, which means the investment downside is capped.
In addition, investors have the option to redeem their shares for their pro-rata portion of escrowed funds if they don’t want to continue with the proposed qualifying acquisition.
Benefits and challenges for sponsors
As mentioned, a major appeal of SPACs is the fact that the IPO process is much faster and less costly than a traditional IPO. Typically a SPAC IPO can be completed within a three-month time frame and the fees and expenses paid as part of the process are very limited.
Once listed, the SPAC will have the capital available to utilize for the qualifying acquisition and react quickly over other competing bidders which may not already have the required financing in place. Also, the SPAC has the ability to generate additional funds required to finance the qualifying acquisition from public investors, as needed.
SPACs are not without their challenges, however, not the least of which is bringing together teams of professionals with the necessary credibility, influence and funds to attract other investors. While not as costly as a traditional IPO, there are also ongoing expenses associated with the process, including marketing, accounting, legal, reporting and other administrative tasks.
The acquisition time constraints of 36 months can also be a challenge. In addition, the SPAC may end up with a shortfall of funds if the investors opt to redeem their shares and not participate in the closing of the qualifying acquisition. In these situations, the sponsors may have to go back to the market to make up for any shortfall or arrange an alternate source of financing.
Questions to consider throughout the SPAC process:
SPACs may be a relatively new alternative investment vehicle in Canada, but they have shown considerable growth in 2015. The success of the SPAC model is linked to the completion and quality of the qualifying acquisitions.
Before commencing an exercise to launch a SPAC, interested sponsors should first take the time to educate themselves as to the benefits and risks associated with the SPAC listing and requirements.