SPACs — Money goes public

From incep­tion to closing, a SPAC tran­sac­tion gene­rally goes through three phases that must be comple­ted within the first two years. Other­wise, the SPAC will be dissol­ved and inves­tors will receive their invest­ment back.
At the begin­ning of the 1st phase, capi­tal is sought from inves­tors for the forma­tion of the SPAC. After the IPO (Phase 2), SPAC looks for a target company, often start-ups, but other compa­nies may also be targets. The 3rd phase of the SPAC occurs when the spon­sors or initial share­hol­ders have deci­ded on a target company. In order for a SPAC to become a new publicly traded company, the majo­rity of inves­tors must agree with the selec­ted company.
If a target company is found, the SPAC and the target company merge and are in the capi­tal market. In a “fourth” phase, the new company has to survive on the stock market and this is regu­larly underestimated.

For the spon­sors or inves­tors, the main advan­tage of a SPAC is that they do not have to deal with the company’s opera­ti­ons at the outset and can exch­ange their share certi­fi­ca­tes (approx. 20 percent of the outstan­ding shares, which are purcha­sed at nomi­nal value) for the inves­ted capi­tal at any time. — For small and medium-sized busi­nesses, SPACs can create grea­ter access to liqui­dity resources.

One of the risks is that the target company is unknown to inves­tors when the SPAC is formed. They invest in a shell and trust that a SPAC Merger will occur and gene­rate a return with the even­tual target company. — For the target company, the report­ing and disclo­sure requi­re­ments are complex, as they are usually very diffe­rent from the previous requi­re­ments of their finan­cial state­ments. Consul­tants are rather rare here in Germany.

For many inves­tors, the expe­ri­ence with SPACs in Germany in 2008 to 2010 was less posi­tive. The German market is deve­lo­ping hesi­tantly, with only three SPACs listed on the Frank­furt Stock Exch­ange. The first new SPAC in Germany after many years was Lake­star SPAC 1, which went public at the end of Febru­ary 2021. 27.5 million “units” were placed at a price of 10 euros, with a volume of 275 million euros. On the stock market, Lake­star shares curr­ently cost 7.50 euros, after the price had risen to 12.30 euros in the mean­time. This is not unusual: most SPACs in the U.S., where nearly 300 such shell compa­nies have alre­ady gone public in 2021 alone, are trading around their usual issue price of $10 or slightly above. Howe­ver, the share price perfor­mance after a merger with a target company is often negative.

The prolon­ged policy of cheap money pursued by the leading central banks has made substan­tial liquid funds available on the capi­tal markets. SPACs are an outlet for liqui­dity; they create a way to invest in an active busi­ness of compa­nies through shell compa­nies that are initi­ally all cash. For start-up compa­nies, SPACs are conside­red a “fast lane” to the stock market. For exam­ple, SPACs are a topic at nearly every IPO readi­ness meeting for compa­nies. For under­stan­da­ble reasons: Because going public via SPACs is, at least appar­ently, much easier for small start-ups. Other­wise, the neces­sary capi­tal will have to be coll­ec­ted at great expense. Careful atten­tion must be paid to the many details mentio­ned, other­wise the frequently propa­ga­ted “simpli­city” of SPACs can very quickly turn into the opposite.

Thus, SPACs target a point between public capi­tal market access and private equity houses. Regu­la­tors are called upon to absorb the extreme speed to curb the risk of crashes.

About Prof. Rüdi­ger Loitz

Prof. Dr. Rüdi­ger Loitz teaches natio­nal, inter­na­tio­nal accoun­ting and taxa­tion at the Faculty of Busi­ness Admi­nis­tra­tion of the Univer­sity of Colo­gne since 2009, after study­ing and obtai­ning his docto­rate in Colo­gne and Hamburg until 1996. A certi­fied public accoun­tant, tax advi­sor and U.S. CPA, he is a part­ner at PwC and leads the capi­tal markets and accoun­ting prac­tice. He spent two second­ments in England and Spain. He publishes regu­larly on finan­cial report­ing appli­ca­tion issues, process and tech­no­logy use in this envi­ron­ment. On behalf of the Cham­ber of Audi­tors and Tax Advi­sors, he parti­ci­pa­tes in the exami­na­tion of candi­da­tes for the profes­sion. He lives with his family near Düsseldorf.