Planning With SPAC Securities
Taking Advantage of New Discounting Opportunities
Capital markets statistics show it: The SPAC, or Special Purpose Acquisition Company, is the new initial public offering. For advisors accustomed to pre-offering discounting opportunities in previous booms, that raises the obvious question – can the current rush to take companies public, albeit through a different route – also be turned into estate planning gold? Not to spoil the full article, which will be in the March issue of Trusts & Estates, but there are many opportunities, including for SPAC sponsors, investors, and for the original shareholders in the private company going public through the SPAC transaction.
To cut a long story short, the SPAC first goes public after issuing a special class of shares and warrants to its founders, and then goes looking for an acquisition target (a private company looking to go public). It also raises additional capital, typically, in a PIPE. Now, then, we have the following securities, all with interesting valuation aspects to them:
- The founder shares. These are held by the LLC set up by the actual, individual, sponsors, along with their warrants. By convention, this is captioned Class B common stock. These shares are not publicly traded but are set to convert to Class A upon completion of the merger. However, even after conversion, the shares are locked up from trading for some time.
- The regular shares purchased by investors in the IPO, usually called Class A shares. These shareholders get to vote on the merger and, also, any shareholder who for any reason wants out, pre-merger, can have his shares redeemed for $10.00 per share, plus interest. He gets to keep the warrants, which is the shareholder’s compensation for parking cash with the SPAC for 12-18 months.
- The PIPE shares. These shares are unregistered, and held as a concentrated position, and thus illiquid.
- The shares in the private company. Prior to the merger, these shares have no public market and would be valued based on standard valuation metrics from comps, prior investment rounds, an income approach, etc.
Thus, at various times during the life of the SPAC, in the ideal case, all of these very different shares are converging in value on $10.00 per share until the merger is announced (and at some share price higher or lower than that once the merger is announced and the market begins to take the specifics of the target and the deal into account). But until each share is freely tradable at a public market price, each would be valued at a discount. And what’s the discount? That varies over time, and with the specifics of each security, and each deal.
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