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Can LATAM Businesses and Investors Benefit from SPACs?
WHAT ARE SPACs?
Special purpose acquisition companies (“SPACs”) are corporate entities without any commercial operations which are formed to raise capital through an initial public offering (“IPO”) for purposes of acquiring an existing U.S. or non-U.S. operating company.
SPACs allow existing companies to gain access to the US public markets and also allow investors to access promising new companies while helping entrepreneurs take their companies public. The process SPACs follow takes less time and is cheaper than a traditional IPOs.
WHAT STEPS DO SPACS FOLLOW?
Following incorporation, a SPAC raises funds for acquisitions through an IPO, listing its shares on a public stock exchange. In advance of the IPO, the founders (also known as sponsors) will incorporate the SPAC and typically serve as directors and officers of the SPAC. While the SPAC will not have any business operations or assets (other than the IPO funds), it will have an experienced management team, including the founders, focused on identifying suitable acquisition targets.
On the SPAC IPO, investors will typically receive shares and warrants in the SPAC. The founders will often retain a 10%-20% equity holding and may hold a combination of ordinary shares / common stock or preferred shares entitling them to a certain proportion (often 20%) of the upside when the listed share price of the SPAC post-acquisition reaches a certain level. This structure is designed to incentivize the founders to generate value for the SPAC investors. The sponsors also typically purchase warrants in the SPAC in a private placement that occurs concurrently with the IPO, with terms substantially similar to the public warrants. In the U.S., these warrants are restricted securities, and the sponsor typically cannot sell them or transfer such shares until following the completion of an acquisition. This investment is the sponsors’ “at-risk” capital because the warrants will be lost if an acquisition does not occur.
Once an acquisition has been completed by the SPAC, the acquired company becomes publicly listed, thereby shortening the public listing process. In the event that an acquisition is not made within the specified timeframe (typically 18–24 months), the SPAC will be dissolved, and the funds raised for the purpose of acquiring certain companies will be returned to its shareholders.
ADVANTAGES AND DISADVANTAGES OF SPACs
Since a SPAC is already a public company when the acquisition takes place, it simplifies the process for a private company to go public with only an acquisition being required as opposed to a listing. In addition, a SPAC acquisition offers more certainty in relation to the amounts to be received by the private company as opposed to by way of an IPO, and may enable a private company that cannot get an IPO off the ground to go public.
However, the failure by a SPAC to complete a suitable acquisition within its lifetime, resulting in the unwinding of the SPAC, often offers poor returns for its shareholders. Also, it is difficult to ensure that the management team will make a true strategic assessment of opportunities. Higher interest rates tend to make SPACs less appealing to certain investors given their reliance on future earnings.
If you own or run a LATAM based business, or if you are an investor, and would like to learn whether you can benefit from SPACs, we can help!