Companies that have previously gone public through a reverse merger issue are responsible for a significant portion of PIPE securities. In a reverse merger, a private company purchases a shell company that has no current operations and few assets, but is publicly traded. The two companies merge with the shell company as the surviving entity. The privately held company then becomes a public trading entity.
Companies that have gone public through a reverse merger are not necessarily less attractive investments than others. Yet, all else being equal, reverse merger entities often have weaker market liquidity and less institutional following than companies that have gone public through an IPO. For this and other reasons, discounts in the LiquiStat data tend to be higher after a reverse merger.
Special Purpose Acquisition Companies (SPACs), also known as “blank check” companies, are similar to companies that use reverse mergers. The major difference is that SPACs typically come with significant management groups. Each SPAC also provides a significant amount of cash for the business combination, having raised money for acquisitions in its initial public offering.
SPACs typically go public by issuing units, each of which may include one share of common stock and one warrant to purchase stock. During the time between the IPO and the closing of the deal, volatility tends to be low, with volatility levels post-closing determined by the business of the combined entity.
The valuation of SPAC securities must, in addition to the financial characteristics that affect the pricing of PIPE securities, consider the risk of the SPAC not closing a deal and instead liquidating.
For more information on our SPAC and PIPE security valuations, contact Pluris today.