CAIIB ABFM Module D Unit 7 : Special Purpose Acquisition Companies

16/10/2023

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CAIIB Paper 3 ABFM Module D Unit 7 : Special Purpose Acquisition Companies (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 3 (ADVANCED CONCEPTS OF FINANCIAL MANAGEMENT) includes an important topic called “Special Purpose Acquisition Companies”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 3 (ABFM) Module D (EMERGING BUSINESS SOLUTIONS) Unit 7 : Special Purpose Acquisition Companies, Aspirants must go through this article to better understand the topic, Special Purpose Acquisition Companies and practice using our Online Mock Test Series to strengthen their knowledge of Special Purpose Acquisition Companies. Unit 7 : Special Purpose Acquisition Companies

Introduction

A company that does not carry any commercial operations and is incorporated purely for the purpose of raising capital through an Initial Public Offering (IPO) or is incorporated for the goal of acquiring or merging with an existing company, is known as a special purpose acquisition company (SPAC).

A company, structured in this way, enables investors to contribute money to a fund, which is subsequently used for the acquisition of one or more unnamed enterprises, which are only revealed after the IPO.

Advantages Of SPAC

When compared to an initial public offering (IPO), going public through a SPAC merger has the following primary advantages:

Speedier Execution: A SPAC merger typically takes place within three to six months on average, but an initial public offering (IPO) often takes between twelve and eighteen months to complete.
Discovery of the price up front: While the price of your IPO will be determined by the state of the market at the time of listing, you will negotiate the price with the SPAC before the transaction is finalised. This is a far more favourable strategy in an unstable market.
The possibility of raising additional capital: SPAC sponsors will raise debt or PIPE (private investment in public equity) funding in addition to their initial capital in order to not only finance the transaction but also to fuel growth for the combined company. PIPE stands for “private investment in public equity.” Even in the event that certain SPAC investors decide to cash out their shares, it is still expected that the transaction would be successfully concluded thanks to the backstop debt and equity.
Reduced Marketing Cost: Decreased costs associated with marketing as a result of the fact that a SPAC merger is not required to attract interest from investors in public exchanges by means of a comprehensive roadshow (although raising PIPE involves targeted roadshows).
Ease of access to specialised operational knowledge: The individuals that sponsor SPACs are typically seasoned business and financial experts. They can provide their managerial knowledge by drawing on their extensive network of contacts, or they can volunteer to serve on the board themselves.

The following is a list of the additional benefits:

It shortens the time it takes for a company to become publicly traded.
Both valuations and finances will be raised as well.
It grants a greater degree of control over the stipulations of the transaction.
There is less regulatory oversight of SPACs.
When compared to an IPO, the process of going public with a high-leverage company is made much simpler by the availability of SPACs.

Disadvantages Of SPAC

Inability to Track Use
Poor Returns
Low Market Cap
Increasing Regulatory Oversight
Shareholding dilution
Deficiency in available capital
Compact Timeframe for Compliances
Narrow Scope for Financial diligence
Absence of underwriting and comfort letter

SPAC Formation & Timelines

After the initial public offering (IPO), the proceeds are deposited into a trust account, and the SPAC normally has between 18 and 24 months to find and finalise a merger with a target firm.
This process is frequently referred to as de-SPACing.
In the event that the SPAC is unable to accomplish a merger within the specified amount of time, the SPAC will be liquidated, and the profits from the IPO will be distributed back to the public shareholders.
The public shareholders of the SPAC have the option to vote against the deal once a target firm has been found and an announcement of a merger has been made.
Alternatively, they may choose to redeem their shares.
If the SPAC needs additional finances to complete a merger, it may choose to issue debt or additional shares through a transaction known as a private investment in public equity (PIPE) agreement. Alternatively, the SPAC may sell additional assets.

The SPAC Merger

After its formation, the SPAC will normally be required to seek the permission of shareholders for a merger, and it will also prepare and file a proxy statement (or a joint registration and proxy statement on Form S-4 if it intends to register new securities as part of the merger).
This document will contain a description of the proposed merger as well as aspects pertaining to governance, all of which will be seeking approval from the shareholders.
Additionally, it will include a plethora of financial information about the company that is the target of the merger, such as pro forma financial statements demonstrating the effects of the merger, historical financial statements, and management’s discussion and analysis (MD&A).
The merger will be finalised and the target business will transition into a publicly traded firm as soon as shareholders provide their consent to the SPAC merger and all regulatory issues are resolved.
Within 4 business days of the closing, a Form 8-K must be filed with the United States Securities and Exchange Commission (SEC).
This Form 8-K, which is commonly referred to as the Super 8-K, must contain information that is equivalent to what would be required in a Form 10 filing of the target company.

Stakeholders

Typically, special purpose acquisition companies (SPACs) have 3 different stakeholder groups:

Sponsors,
Investors, and

Every one of them is unique in the demands, worries, and viewpoints that they have.

Process

When the SPAC obtains the funds through the IPO, the money is placed in a trust and kept there for a predetermined amount of time or until the acquisition is completed, whichever comes first.
The Special Purpose Acquisition Company (SPAC) is obligated to repay the funds to investors after deducting bank and broker costs in the event that the planned acquisition is not completed or the legal requirements are not yet complete.
A Special Purpose acquisition company is made up of seasoned business leaders who are self-assured about their reputation in the industry and the fact that they have the knowledge necessary to assist them in locating a lucrative company to purchase.
When seeking financial backing from investors, the founders of a company are the primary selling point.

SPAC Capital Structure

To raise the necessary funds to finish the acquisition of a private company, a SPAC typically conducts an IPO.
The funds are often gathered from institutional and retail investors and are kept in a trust account.
In exchange for their investment, investors get units of SPAC, each of which contains a share of common stock and a warrant to buy more shares at a later time.
After the IPO, the units can be split up into warrants and shares of common stock that can be sold on the open market.

Trust Account

In connection with the closure of the IPO, a sum equal to or greater than 100% of the gross proceeds of the IPO is used to finance the trust account, with roughly 95% of the funds coming from the general public and 5% from the sponsors.
The money in the trust account is invested in government securities, or it is kept as cash, to pay for the business combination, the redemption of common stock under a compulsory redemption offer, the payment of the deferred underwriting discount, any transaction costs, and the company’s working capital following the De-SPAC transaction.

Warrants

The warrants are purchased in their whole by the sponsor, whereas the units offered for sale to the general public often include only a portion of a single warrant.
In larger initial public offerings (IPOs) these days, the issuance of one-third of the warrant is more prevalent; nonetheless, the standard practise is to issue half of the warrant.
In every circumstance, the entirety of the warrants can be put to use.
In most cases, the share price at the time of the first public offering will serve as the basis for determining the strike price of the warrant.
The public warrants are typically settled in cash, with the investor being required to pay an amount equal to the warrant’s strike price in exchange for a share of the company’s stock.
On the other hand, the founder warrants are net settled, meaning that the founder is not required to make a payment in cash but rather receives a number of shares of stock with a fair market value equal to the difference between the trading price of the stock and the warrant’s strike price.

Forward Purchase

Affiliates of the sponsor or institutional investors engage into a forward purchase agreement with the SPAC, devoted to purchase equity (stock or units) in conjunction with the De-SPAC transaction to the extent that the additional funds are necessary to complete the transaction.
In situations in which a private equity fund or another investor with a limited investment mandate commits forward purchase, it may be appropriate to condition the obligation of the investor on the De-SPAC Transaction satisfying the investment mandate of the investor.
This is because private equity funds and other investors with limited investment mandates often make forward purchase commitments.

IPO Agreements

The establishment of the SPAC as well as the initial public offering of the SPAC both involve the customary signing of a series of contracts and other documents. There are a few documents that are universal to all SPACs, such as the registration rights agreement and the certificate of incorporation. The remaining documents are specific to SPACs and cannot be found elsewhere.