SPAC Fever Returns: Should Companies Consider It in Financing Decisions?

Special purpose acquisition companies (SPACs) are having a moment. According to industry tracker SPACInsider.com, as of November 10, there have been 172 SPAC deals this year, raising approximately $63 billion, with an average deal size of $367 million. Five years ago, the corresponding figures were just 20 deals raising $3.9 billion, averaging $195 million per deal.

SPACs are also making headlines. Playboy Enterprises went public again through a merger with Mountain Crest Acquisition Corp.; Richard Branson's Virgin Group launched VG Acquisition Corp.; and former NBA star Shaquille O'Neal joined Forest Road Acquisition Corp. as a strategic advisor.

These recent headlines might make it seem like SPACs are Wall Street's newest financial engineering product, but that is not the case. SPACs have existed for more than 20 years, and some industry participants have been active throughout.

"The SPAC structure has evolved over that time, and there have certainly been different versions, but it is by no means a new phenomenon," said Tamar Donikyan, an attorney at Ellenoff Grossman & Schole LLP.

SPACs allow companies to go public without going through the traditional IPO process; the SPAC itself goes public first, then acquires another company, giving the latter a public trading status. In essence, a SPAC is a fundraising machine: the capital raised is placed in a trust account, and the management team uses that money to finance an acquisition within 18 to 24 months. The management team typically has acquisition or operational experience in a target industry, and the funds raised provide backing for future acquisitions.

Capital appeal: from alternative to mainstream

The recent fundraising success of SPACs masks their former second-class status. Chris Wright, managing director at Protiviti, noted that until recently, SPACs were not viewed as an ideal source of capital. Previously, SPACs were often seen as a listing route for companies with no other options. The recent improvement in the quality of participating companies and the scale of fundraising have changed that perception.

"Unlike at this time last year, CFOs and companies should now consider SPACs just as they would consider other investment alternatives," Wright said.

Electric vehicle battery manufacturer Romeo Systems, Inc. had completed a Series A funding round in 2019, with Borg Warner as a strategic investor. The company's CFO, Lauren Webb, said it subsequently needed another large capital infusion to support long-term growth. "We considered several avenues," Webb said. "One was a Series B, and the other was the SPAC route. From the company's inception, we thought going public would be great, and this company is well-suited for it. The SPAC route offered all the benefits of an IPO without the lengthy timeline and avoided the associated restrictions and costs."

As Webb noted, a key selling point of the SPAC process is that it can be completed faster than an IPO. Romeo Systems took about six months from discussions to announcing its deal with RMG Acquisition Corp. Because typical startup IPO costs are avoided, the expenses of completing a SPAC merger are also much lower.

"There are certainly costs associated with completing audited quarterly financials within an accelerated timeframe [via a SPAC]," Webb said. "But financial, advisory, legal, and registration fees were around $5 million to $6 million—excluding underwriter and acquirer fees—whereas a traditional IPO could cost tens of millions."

In SPAC deals, forward-looking projections can be used in combination with historical financial data, which is another benefit for early-stage companies and can save on additional audit costs. In Romeo's case, the company already had substantial contracted revenue from top automotive clients.

Hai Tran, CFO of acute care telehealth provider SOC Telemed, said the compressed timeline of a SPAC is both a blessing and a curse. The company completed its SPAC merger in early November. Although the SPAC provided a fast route to going public and access to capital, the company had to determine whether its books, records, and financial functions met public company standards. As a result, preparing for the merger often requires bringing in additional accounting and legal experts.

Risks and considerations: internal controls, dilution, and long-term vision

Donikyan noted that another difference between an IPO and a SPAC is that the SPAC entity itself is already public, so the clock has already started ticking on Sarbanes-Oxley and internal control compliance requirements. "It's very likely that by the time the SPAC acquisition is completed, you need to have your internal control procedures up and running," she said. "This differs from an IPO, where there may be an opportunity to phase in implementation."

David Meniane, CFO of CarParts.com, said his company decided against SPAC financing. He agreed that SPACs work well in the right circumstances but cited several cautionary factors that CFOs should consider. He believes standard SPAC deals are often costly in terms of dilution, pointing to the warrants commonly held by sponsors and investors.

Another factor is the potential misalignment between the long-term vision of SPAC sponsors and company management. "If you get a great deal and the sponsor only keeps 3% to 5%, then who you work with doesn't matter much—what matters is the quality of the underlying shareholders," Meniane said. "But if the sponsor retains 20% in a SPAC deal, they could have significant control over the company's future. It's a bit like a marriage; you need to choose your partner carefully."