Special Purpose Acquisition Companies or SPACs are now being
taken seriously due in part to the waning frequency of initial public offerings. All major investment banks have
underwritten them, and they are either
eligible to be listed or are currently
being eyed for listing on all three major
U.S. stock exchanges.
“The availability of three markets could
go far in ensuring the continued viability
of SPACs,” says Mark A. B. Carlson, a
shareholder with Baker, Donelson,
Bearman, Caldwell & Berkowitz, PC in
Atlanta and co-leader of the firm’s
Corporate Mergers & Acquisitions group.
Smart Business spoke with Carlson
about SPACs’ potential as financing vehicles and the rules they must abide by.
What is a SPAC?
A SPAC is a nonoperating company
that raises capital for a future, unspecified acquisition. Once the SPAC targets
an operating company (usually private)
to acquire, it must obtain the affirmative
vote of the SPAC’s stockholders to complete the acquisition. SPACs often voluntarily escrow at least 90 percent of their
offering proceeds until the earlier of the
approval of an acquisition or 18 to 24
months after the date of the initial registration statement with the Securities and
Exchange Commission (SEC). Further,
prior to the AMEX standards, SPACs
faced the significant obstacle of being
ineligible to list on stock exchanges. In
turn, they were not ‘covered securities’
and were subject to state blue-sky
registration.
Why have SPACs gained legitimacy in
recent years?
SPACs have gained legitimacy in recent
years as the frequency of initial public
offerings has waned. All major investment banks have underwritten SPACs
and, despite a slowdown in the second
quarter of 2008, the financing vehicles are likely to remain part of capital markets for years to come. Although SPACs
have been eligible to list on AMEX for
more than two years, the NYSE and
NASDAQ have now proposed and/or
adopted standards that will allow the
listing of securities of a company that
has but one asset, cash and no underlying business.
What rules must SPACs conform to under
the NYSE?
First, the NYSE’s listing standards
were approved by the SEC on May 6,
2008, and are now part of the NYSE’s
Listed Company Manual. Under the
NYSE’s listing rules, the SPAC must
escrow into trust at least 90 percent of
the IPO proceeds until the SPAC consummates a business combination with
a fair market value of at least 80 percent
of the net assets of the trust.
Furthermore, the shareholders must be
granted the right to approve a business
combination by majority vote, and those who vote against the transaction must
be given the right to convert their shares
into cash equal to the amount of their
proportional share of the escrowed
funds. The NYSE’s rules give SPACs
three years to complete the acquisition
of an operating business. Under the listing standards, SPACs must have an IPO
price of at least $4 per share, a post-IPO
aggregate market value of at least $250
million and a market value of publicly
held shares of at least $200 million.
Where do SPACs now stand as far as being
listed on NASDAQ?
On April 18, 2008, NASDAQ submitted
its proposed SPAC listing standards to
the SEC. Though not yet approved by
the SEC, the standards would allow
SPACs with market values of $75 million
to list on the NASDAQ Global Market (or
$50 million in the case of the NASDAQ
Capital Market), which allows for a larger group of SPACs than the NYSE standard. Like the NYSE standards, it is
mandatory that the proceeds of the IPO
be escrowed, an acquisition occur within three years of the IPO and the stockholders of the SPAC be given the right to
approve the transaction.
Will SPACs ever be listed on all three
exchanges?
If SPACs regain their traction after
their slowdown in the second quarter of
2008, promoters and investors alike will
be relieved to find up to three exchanges
willing to list their securities. The availability of three markets could go far in
ensuring the continued viability of
SPACs.
MARK A. B. CARLSON is a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta and co-leader of the
firm’s Corporate Mergers & Acquisitions group. He can be reached at (404) 589-3400 or [email protected].
