Raising capital through a Special Purpose Acquisition Company (SPAC) provides a unique pathway for businesses seeking public investment without the traditional initial public offering (IPO) process. Recognized as a more efficient and flexible alternative, this method offers a fresh perspective in acquiring financial resources. For SPACs, a firm grasp of capital-raising methods greatly impacts their ability to effectively find, acquire, and merge with target companies, ultimately shaping their performance in the financial market.

Introduction to Raising Capital via SPAC

Capital raising, the process of securing financial resources for business operations and growth, is fundamental to the lifecycle of Special Purpose Acquisition Companies (SPACs). In SPACs, this involves gathering funds not only for their establishment and initial public offering (IPO) but also for future mergers and acquisitions, ultimately supporting post-merger expansion. Essentially, it is the fuel that propels a SPAC from a conceptual entity to a fully operational and impactful player in the business world.

The SPAC market, however, experienced a notable shift in 2023. With only 29 SPAC IPOs raising US$3.7 billion, there was a significant drop from the 86 IPOs that accumulated US$13.4 billion in the previous year. This downturn underlines the volatile nature of capital raising in the current economic climate, emphasizing the need for strategic financial planning and a deep understanding of market dynamics. For businesses exploring SPACs as a capital-raising avenue, adapting to these market changes and strategically managing capital has become more crucial than ever.

Decoding SPACs: Navigating the Capital Raising Journey

In the realm of SPACs, capital raising is not just a preliminary step but a continuous process that underpins every stage of their lifecycle. Additionally, every stage presents unique financial needs and employs specific strategies to secure the necessary funding.

Seed Capital Stage

• Financial Requirements: Initially, a SPAC needs seed capital for legal and operational setup, including expenses for legal incorporation, SEC registration, and underwriting the IPO.
• Funding Approach: SPAC sponsors usually provide this seed capital, investing personal funds to cover these foundational costs. This initial investment is a testament to the sponsors' commitment and paves the way for the IPO.

IPO Stage

• Financial Requirements: The primary method for a SPAC to raise substantial capital is through its Initial Public Offering. Funds raised in the IPO are placed in a trust account, with strict regulations on their usage, ensuring they are reserved solely for acquisition purposes or returned to investors if the SPAC fails to complete an acquisition within a specified timeframe.
• Funding Approach: The SPAC acquires this capital by offering shares to the public, attracting both institutional and retail investors. The raised funds are safeguarded in a trust account, ensuring they are reserved exclusively for acquiring a target company.

Merger-ongoing stage

• Financial Requirements: Once the SPAC has successfully raised funds through the IPO, the focus shifts to identifying and acquiring a target company. This phase usually includes expenses related to due diligence, legal fees, and advisory services.
• Funding Approach: The IPO's trust-held funds are the initial financial resource for acquisition. If the SPAC finds that the IPO proceeds are insufficient for this purchase, it may need to raise additional funds. Common methods for this include engaging in Private Investment in Public Equity (PIPE) deals, where private investors buy shares at a pre-negotiated price, establishing strategic partnerships for joint investments, or utilizing debt financing options such as loans or bond issues to secure the necessary additional capital.

Post-Merger Growth and Operations Stage

• Financial Requirements: After the merger, the new entity formed from the SPAC and its acquired company requires capital for several purposes. These include the integration of the two companies, operational expenses of the now-public company, and funds for implementing growth strategies and expansions.
• Funding Approach: To meet these post-merger financial needs, the company may turn to various funding options. This can involve issuing new shares in a secondary public offering to raise additional capital, or opting for debt financing, such as loans or bonds.

The exploration of capital raising in SPACs highlights its integral role throughout the lifecycle of these entities. However, these activities also introduce a suite of legal risks, combining the complexities of securities regulation compliance and the potential for investor disputes into a single, multifaceted challenge within the capital raising journey.

Legal Risks in SPAC Capitalization

The capital raising process in SPACs, while offering an alternative to traditional IPOs, introduces distinct legal risks, particularly due to its accelerated timeline and different levels of scrutiny. These risks become particularly prominent in the subsequent stages of a SPAC's lifecycle, whether in the context of a successful merger or in scenarios where the merger does not materialize.

In successful SPAC mergers, the legal risks primarily involve securities litigation and compliance. These risks often manifest as class action lawsuits brought by investors alleging misrepresentations or inadequate disclosures about the target company's financial situation. Additionally, SPAC officers and directors may face scrutiny regarding their fiduciary duties, particularly in courts like the Delaware Court of Chancery, emphasizing the importance of diligent governance and transparent operations.

However, when SPAC transactions do not lead to successful mergers, the focus of legal risks shifts, mainly involving disputes related to the merger process. These scenarios can lead to disputes centered around the terms of the merger agreements and financial obligations, such as disagreements over due fees and costs. The SPAC leadership, including officers and directors, may also encounter legal scrutiny over their handling of the failed merger, potentially facing claims of breach of fiduciary duty.  

At First Cover, our D&O insurance solutions masterfully manage the intricate legal risks involved in SPAC capitalization. We provide unparalleled protection for directors and officers amidst the complexities of successful mergers, shielding them from intense securities litigation and stringent compliance challenges. Choosing us means selecting the best partner for unwavering defense against potential fiduciary breaches and merger agreement disputes, ensuring the highest level of risk management for SPAC leadership.

References:

SPACs: What You Need to Know-Harvard Business Review

Global IPO Trends 2023 - Ernst & Young

SPACs—An Alternative Method of Capital Raising- globalEDGE Blog

Looking to raise capital?-pkf-l.com