According to Bloomberg research data, the recent flood of special purpose acquisition companies (SPACs) has propelled private businesses onto U.S. stock markets, allowing them to avoid the complexities of traditional initial public offerings (IPOs). However, as with any type of merger, it is important to consider all the potential risks and outcomes, and to plan accordingly.
The following are three considerations for businesses when entering a SPAC transaction.
1. Delayed Timelines
Most SPAC transactions typically have two years during which sponsors must complete an acquisition. According to Barron’s, if the deal isn’t concluded by the established deadline, the cash in its trust is returned to shareholders and sponsors lose their investment in the SPAC.
2. High Redemption Costs
Reuters describes redemption rights as a way to incentivize investors by providing a type of money-back guarantee that allows them to redeem shares at the original IPO price — typically a nominal $10 per share. However, if a large percentage of shareholders elect to exercise their redemption rights, cash proceeds can be substantially reduced. In addition, high redemption rates could result in the SPAC failing to meet its minimum cash requirement to continue with the transaction.
3. A No-Go Deal
According to Middle Market Growth, when a SPAC and an operating company enter exclusive negotiations, there is no assurance that the acquisition will actually make it to the finish line. The fact is, after several months of an arduous due diligence process and invested time and money, many of these deals never come close to fruition – for a number of reasons. These deal-breakers can include several factors (e.g., financing challenges, environmental issues and, recently, COVID-19). A collapsing deal could also be attributed to a simple change of mind by the buyer or seller.
While a SPAC acquisition may require less time than a traditional IPO, the merged company must still comply with all Securities and Exchange Commission filing requirements. — Middle Market Growth.
A Directors & Officers insurance policy is vital to mitigating IPO-related claim events preceding the transaction date, as well as after the sale. If you are a private company that’s planning to go public, the experts at Oakwood D&O can help you mitigate liability risks with the right D&O insurance policy.
Selling your D&O book of business? Are you a company or broker with a quality book of D&O business that you are planning to sell? Currently, Oakwood D&O is expanding its book and market reach by acquiring D&O business accounts. With proper due diligence and favorable agency terms, we can ensure a smooth transfer of business when you’re ready to move forward.
Get in touch: Email Eli Solomon, CEO, at email@example.com or call 323-686-7519. You can also follow Oakwood D&O on LinkedIn.