Pub. 1 2021 Issue 2

24 | The Show-Me Banker Magazine In 2020, SPACs raised approximately $80 billion — about as much as the last 10 years combined. By most estimates, there were over 235 public SPAC offerings last year, with an average public offering of $334.8 million. SPAC fundraising in 2020 accounted for about 50% of the IPO market share. Incredibly, by mid-February 2021, SPACs had raised more than $38 billion, with an average of $296 million for 128 SPAC IPOs. That is nearly half of the total amount of money raised in 2020 and exceeds the total raised in 2019 — all in just two short months. The increased popularity of SPAC money raised has finance profession- als wary and bracing for a seemingly inevitable burst of the SPAC bubble. However, it is difficult to predict when that burst will occur, particularly as market professionals, and even celebrities and athletes, buy into the trend. What is certain is that as the populari- ty of SPACs increases, the controversy surrounding SPACs will too. This could have an impact on the banking sector in many ways. For example, a number of the companies being acquired by SPACs are in the fintech and alternative banking space, allowing them to de- velop more bank-like products to compete with traditional banks. Further, the businesses that SPACs acquire have relationships with financial institutions that may be altered or disrupted through the public company reverse-merger process. What is a SPAC? Despite being around for years, the general investing public is not well educated about SPACs. Simply put, a SPAC is an entity formed with no operations or specific business purpose. You may also hear a SPAC called a “blank check company.” Typically, a SPAC is formed by a management team, referred to as the “sponsor.” There are two clear stages of a SPAC’s life cycle: (1) the initial public offering (IPO) and (2) the business combination. First, investor funds are raised through an IPO with the stated intention of subsequently acquiring or merging with an uniden- tified existing privately held company. Once the money is raised, the funds are put in a trust to await the next step — the business combination. The funded public company has about 24 months to find one or more businesses with which to combine. Once the SPAC has identified an initial business combination op- portunity, it negotiates all of the terms of the combination at arm’s length with the target company and executes the business combi- nation. This opportunity is then presented to the SPAC sharehold- ers for approval under federal proxy rules. If approved, the private target company, in essence, reverse merges with the publicly traded SPAC and then carries on its business — but now as a public reporting company. Challenges with Anticipated SPAC Business Combinations in 2021 Meanwhile, potential investors looking to jump on the SPAC bandwagon should be conscious of an impending scarcity of viable privately held operating companies that is likely to occur as the market becomes more saturated with SPACs — particularly as management teams who have seen success with other SPAC mergers establish credibility and establish more SPACs. With the increased competition, it will become more difficult for SPACs to acquire an attractive private company. Additional concerns are likely to arise with SPAC business com- binations in 2021. The SPAC acquisition due diligence process is largely completed by the SPAC’s management or sponsor and facilitated with the target company’s help. There is a heightened THE SKY WAS THE LIMIT FOR SPACS IN 2020 By John Sten, Partner, Armstrong Teasdale, Steven Foristal, Partner, Armstrong Teasdale, Allison McFarland, Associate, Armstrong Teasdale, Brittney Herron, Associate, Armstrong Teasdale BUT ARE CLOUDS ON THE HORIZON FOR 2021?