In Part 1 featured in Issue 8 we endeavored to explore on a high level the nature of SPACs and how they operate. In Part 2, we will be your guide through a select few current examples of SPACs on the marketplace. Feel free to jump ahead to a particular SPAC that’s interesting, or read them all – but in any case, be sure to note the common motivations behind creating the SPAC, as well as the tendency to attach big names to the blank cheques. SPACs only work if they can garner enough support and in turn cash to make a desired qualifying transaction.
The Mechanics
Recall that phase 1 involves the creation of the SPAC by the founders. The founders put-up a minimum amount of seed capital, prepare the IPO prospectus and apply to be listed on an exchange. The founders must maintain a personal equity position between 10% and 20% of the SPAC post-IPO. If listed on the TSX the prospectus must outline an intention to raise at least $30 million by selling SPAC securities for a minimum of $2 each, including shares or units. Once distributed, the SPAC securities are listed for trading on the exchange.
A SPAC unit, which is issued at IPO, generally contains a share and full or partial warrants. The TSX allows a maximum of two share warrants per unit. There are a variety of warrant conversion formulas depending on how the SPAC is set up, but ordinarily, the warrant will give the holder the right to purchase an amount of common stock by exercising the warrant at a certain strike price after the SPAC merges with the target company. The main advantage of warrants for SPAC investors is the possibility for high returns (though, with higher risk) and the ability to potentially purchase additional shares at a later time for less money. Conversely, warrant-holders risk losing their entire investment if the SPAC fails and they only hold warrants, since there will be no common shares to convert into, whereas holders of common shares will be paid out of the fund if the SPAC is liquidated.
Phase 2 involves the SPAC management team finding a suitable target and performing the qualifying transaction within 36 months. When a target is identified an information circular with prospectus-level disclosure on the resulting issuer is filed with the TSX and responsible securities regulator. A majority of the public shareholders, excluding founders, must approve of the transaction. As you will see in the examples below, the qualifying transaction is certainly what makes or breaks a SPAC.
NextPoint Acquisition Corp. (TSE:NAC.U)
As one of the two major Canadian SPACs, NextPoint shows real promise by focusing where all the other Canadian SPACs are not. The cannabis boom in Canada spurred one too many SPACs, including Canada’s only other large blank cheque, Bespoke Capital Acquisition Corp. (TSE:BC.U). Because demand for cannabis products has largely been overestimated, Bespoke Capital is now left hanging-out as a publicly traded shell company with gloomy prospects. Though Bespoke Capital is not completely doomed, they have been public for over a year and there has been little news or indication that they are nearing an acquisition, and while there is no technical requirement limiting the SPAC to the cannabis industry, its management will undoubtedly face criticism for any sudden pivot away from the industry.
NextPoint however has its sights on the alternative lending and financial services industry. With the industry in constant flux and continuous evolution, it seems like an exciting space to be in. There are many Canadian companies that may fit the bill for NextPoint, including Wealth Simple or even much smaller companies such as Lending Loop – a company focused on sourcing business loans from its members.
NextPoint went public in August of 2020 and raised aggregate proceeds of US$200 million, and an option for the underwriter (Canaccord Genuity Corp) to purchase up to an additional 3 million Class A restricted voting units, for additional aggregate proceeds of up to US$30 million. When all is said and done, NextPoint has up to $230 million to spend. When it identifies a private Canadian firm in the alternative lending space that is looking to raise capital, NextPoint and that firm may merge, and the $230 million will then become available to the target. While a company like WealthSimple may seem a perfect candidate for a reverse takeover with NextPoint, they may have grown too large. In 2018 a single Wealth Simple shareholder, Power Financial, had invested a total of $165 million. The company’s value is therefore likely to far exceed NextPoint’s buying power, though there are likely many other attractive targets. NexPoint may be an attractive avenue to go public for Canadian fintech firms looking to keep their attention on innovation in an already fast paced industry instead of dedicating time and money on the lengthy IPO process.
The Parent Company (NEO:TPCO)
The Parent Company is the final product of a SPAC in California that, interestingly, went public in Canada on the NEO exchange (likely due to the lack of Federal-level cannabis legalization in the U.S.). The SPAC was named Subversive Capital Acquisition Corp and acquired cannabis brands Left Coast Ventures and Caliva. The SPAC became popular when billionaire rapper and business, man, Jay-Z joined The Parent Company as Chief Visionary Officer. Prior to the reverse takeover Jay-Z was set to launch a line of cannabis with Caliva called Monogram. Jay-Z’s Roc Nation also entered into a partnership with The Parent Company, and some of the label’s artists, including Rihanna, Yo Gotti and Meek Mill have invested in the company by way of a private placement.
Subversive Capital had held $575 million in trust, making it one of the most well-funded cannabis firms in the U.S.. The new merged entity combines the revenues of Caliva and Left Coast Ventures into $185 million for 2020, expecting to hit $334 million in 2021. The Parent Company has set the ambitious goal of reaching 90% of all cannabis users in California by 2022. Total sales in the California cannabis market almost reached $3 billion in 2019. What really makes this company stand out is its Social Equity Ventures arm which has pledged to invest a minimum of 2% of its net income into BIPOC-owned cannabis businesses. Supervise Capital was the ideal way for Caliva and Left Coast Ventures to merge and go public in one clean transaction.
Pershing Square Tontine Holding (NYSE:PSTH)
Behind this SPAC is famed hedge fund manager Bill Ackman. Ackman is no stranger to SPACs having acquired Burger King back in 2011 through Justice Holdings Corp. After that successful deal, Ackman worked with 3G Capital to merge Burger King into the Restaurant Brands umbrella. When it went public PSTH was the largest SPAC of all time, raising $4 billion – miles and bounds ahead of the SPACs listed above. Ackman has said that PSTH will pursue a mature unicorn, which have traditionally not faced much pressure to go public and makes the SPAC unique in comparison to other popular blank cheques. Rumours about potential targets have included SpaceX, Bloomberg and Stripe. It will be interesting to see where Ackman takes his $4 billion war chest and the implications it will have for the reverse takeover to become a viable means of going public for larger, more established companies.
Across all of these deals there are undeniably efficiencies to be achieved, and the SPACs have, or soon will, provide a smooth way for the target firm to become a publicly traded company – allowing them to access not only the money already raised but also the ability to tap public markets in the future as the need may arise. But why the sudden uptick in SPACs in both 2020 and 2021? They have been around for over a decade and their resurgence should incite curiosity. It seems that the rise in retail investing may be a key if not common element. If there were no retail investors in SPACs, then the large institutional investors would continue to proceed by way of private placements as they always have. SPACs allow retail investors to bolster the efforts of sponsors and other large investors by providing an avenue to invest that they otherwise would have no access to. Private equity for the average Joe, if you will.
If the retail investor element is true – that is, the resurgence of SPACs has in large part occurred due to the increasing number of retail dollars in the markets – then the implications for investor protection are as paramount as ever. As seen above, celebrity and famed names are often attached to SPACs which undoubtedly is aimed at herding retail investors in. In Part 3 we will explore what retail investors should watch for when investing in a SPAC and the wider underlying implications for our capital-raising system. We remain skeptical that the majority-approval requirement and the ability for dissenting shareholders to be paid-out are sufficient investor protections.
