SPAC is also known as “The Blank Check Company”. After SPAC launches and shares trades in the stock exchange, the raised capital will be safely deposited into a third-party custodian. The money, which will earn interest, will be locked for 2 years maximum.
As soon as the IPO is completed, the Management team starts searching for a private company to acquire and negotiating with responsible people in the targeting company. After reaching an acquisition agreement with the target, the Management team has to propose their plan to the shareholders and start voting to get shareholders’ consensus. The acquisition process can be kicked off and money can be withdrawn from the custodian account for settlement when the majority shareholders support the deal. Shareholders, who do not agree to the acquisition, can redeem their shares and get their money back from the custodian.
When the acquisition is completed, SPAC and the acquired company will merge into one company. The stock exchange will assign a new industrial classification and new stock code to the merged company, meaning DE-SPAC. In 2019, Social Capital’s IPOA SPAC acquired Virgin Galactic, the SPAC ticker ‘IPOA’ was replaced by ‘SPCE’ immediately.
However, if the Management team is not able to complete an acquisition within 2 years, the SPAC will be dissolved and the capital less IPO fee will be refunded to all investors.
According to Nasdaq and SpacAlpha, US-listed SPACs accounted for 79% of all IPO in 2021, 53% in 2020, 23% in 2019 and only 3% in 2013. U$77 billion capital raised via SPAC in the U.S. In 2020, which was almost 6 times the amount in the previous year.
Why are SPACs doing better than IPOs?
Traditional IPO requires heavy preparation works and many underwriters. Companies need to pay a large amount of money to those financial institutions and lawyers as the administration fees. However, most investors become cautious in 2020 when businesses are shut down under the pandemic environment. Many IPOs, including WeWork and Uber, did not have enough subscribers and needed to terminate the selling process with the underwriting fee paid anyway. As a result, SPAC is a better alternative because of the smaller administration fee, the shorter time required, lower risk and less restriction by SEC.
On the other hand, many private companies are suffered from the pandemic, facing financial difficulty since 2020. Owners of those private companies are more willing to sell their businesses than before, so SPAC will have a higher chance to find a good private company, negotiate a better deal and get strong support from its shareholders.
SPAC has been introducing many companies to the market since 1990, including Virgin Galactic, DraftKings, Opendoor and Nikola Motor Co. Excitingly, Virgin Galactic’s stock, which went SPAC in 2019, rose from $11.7 on 2nd Jan 2020 to $59.4 on 11 Feb 2021, creating 5 times value in one and a half year.
SPAC is known as Special Purpose Acquisition Company which is a public listing company with no operating business. It usually consists of a Management team, a Sponsor and a group of small public investors.
At the very beginning, the management team, who are the financial expert, private equity fund managers or famous CEO, generate any investment idea, create a shell company and sell to the public. The more reputation the manager has, the better the roadshow story is, the more money will go after his idea. In Jun 2020, a U.S. Hedge Fund Manager, Bill Ackman, had raised the largest SPAC offer, U$4 billion. Investors believed in his investment ability and his track record, hoping the share price of his SPAC to rise in the future.
Moreover, Anthony Leung, the former Financial Secretary of Hong Kong, had raised U$200 million through SPAC with the investment idea of healthcare technology in China in 2018.
Sometimes an entrepreneur of a start-up company is the Sponsor. Sometimes few private investors buy in an interesting idea from Management, becoming the Sponsors. Otherwise, the Management team, who funds themselves at an early stage, is the sponsor too.
The Process of SPAC Listing
The process of listing a SPAC is much easier than a traditional IPO because it is only a shell company without commercial operation or financial history. The SEC needs to take only 3 to 4 months to review. Besides, SPAC requires little preparation work, small administration costs and only one underwriter anyway.
With the approval from the SEC and the Sponsors, SPAC will allocate 20% of total shares which is known as ‘founder shares’ to sponsors, sell the remaining 80% to public investors at U$10 per share in a stock exchange. Normally, warrants will be given to shareholders to gain their long-term investment commitment.
How can Israel be Outstanding in Start-up industry?
Israelites are creative adventurers. Israel is recognized as the start-up nation, which is ranked the world’s fifth most innovative country by the Bloomberg Innovation Index. They have been spending the highest ratio of GDP on civil R&D in the world for years, reporting 4.95% in 2018 according to World Bank data. They are also one of the most patents filed per capita, too. Moreover, their government has established supportive policies to back up innovation and help their entrepreneurs grow, sponsoring exhibitions of all sectors, including Biotechnology, Industrial processing, Chemical engineering, Agricultural Technology, Defence Security, Electrical engineering, Mobility transportation, Green energy and Environmental technology, throughout each year. Over 50% of government spending was allocated to university research and industrial-technological development. Google Chairman, Eric Schmidt, has complimented ‘Israel has the most important high-tech center in the world after the U.S.’ in his visit in 2012.
Israeli start-up companies are attractive to many global investors. In Mar 2021, a Tech investment firm Flashpoint, which is based in London, plans to raise U$200 million for their secondary fund and half of the fund will be allocated to Israel start-up companies with U$350 million in managed assets in the next 3 years. Frankly, Flashpoint has already invested in Israel-based technology companies for their first fund a few years ago.
In the U.S., ION’s first SPAC raised U$260 million and went public in October 2020, making the largest deal in the Middle East and merging with an Israeli tech company, Taboola, at U$2.6 billion valuations. The deal was multiple times oversubscribed, and the fundraising was more than initially planned. The company claims to be the leading discovery platform globally, reaching over 1.4 billion individuals or 44.5% internet users, generating U$1.2 billion revenue and U$34 million operating income in 2020.
Continuously, Israeli electric vehicle tech company Ree with a valuation of U$3.6 billion, smart car company Innoviz which makes sensors for self-driving cars and a fintech company Payoneer will all go public on Nasdaq through merging with SPACs this year. 20 more Israeli companies are joining too. U.S. investors are attracted by their strong share price performance, taking advantage of their 10% to 30% discount versus American peers.
Intelligent Israelites prefer merging with SPAC to raise funding quickly, expand operation faster and gain the advantages of being a public listing company. Everything moves rapidly in the technology industry, so tech companies cannot wait for 2 to 3 years for a traditional IPO. Nevertheless, they can get money from private investors and stay privately owned forever. By listing as a public company, disclosing financial reports and following regulatory requirements, the company will be able to build up a reputation and provide confidence to partners doing business together. Partners will believe that they will not be acquired or disappear tomorrow.
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