SPACs by David Cohen Tulchinsky Stern Marciano Cohen & Co. Law Offices June 11, 2008
What is a SPAC? SPAC Special-Purpose Acquisition Company An investment vehicle that: Has no operations (shell or blank-check company). Allows public investors to invest in areas sought by private equity firms. Goes public with the intention of merging with or acquiring a company/companies with the proceeds of the SPAC's IPO. 2
What is a SPAC (continued)? Some SPACs go public with a target industry in mind Some focus on a specific country (e.g. Israel, China) Some do not have preset criteria Returns funds to investors if no deal is consummated Minimum liquidation value in the event a business combination is not effected within predetermined period of time. With SPACs, investors are betting on management s ability to succeed. 3
Characteristics Proceeds raised in the IPO of the SPAC: Are held in trust to be used at a later date for the merger or acquisition. Limited Lifetime: Typically 18-24 months Emerging market focused SPACs (e.g. China) - 30/36 month timeline Investor Liquidity Shares are publicly traded. 4
Characteristics Stockholder Rights SPAC stockholders have voting rights to approve or reject the proposed business combination. A majority of stockholders voting must approve this combination. Usually require that no more than a pre-defined percentage (e.g. 20% to 40%) vote against the acquisition and request return of their money. 5
Characteristics When a deal is proposed, a stockholder has three options: Approve the transaction by voting in favor of it, or Sell its shares in the open market, or Vote against the transaction and redeem its shares for a pro-rata share of the trust account. 6
Stock Exchange Listing On the OTC-BB Until 2005 SPAC's shares were listed only on the OTC-BB. On the AMEX 2005 AMEX began accepting applications for listing SPACS. On the NYSE Historically, rules of the NYSE required all listed companies to have some operating history prior to listing. March 6, 2008, the NYSE filed with the SEC a proposed rule change to allow listing of SPACs. May 6, 2008, the SEC approved the rule. On the NASDAQ Historically, NASDAQ denied listing of SPACs under its Rule 4300. April 18, 2008, NASDAQ filed with the SEC a proposed rule change to adopt additional criteria for listing of SPACs. 7
Why a SPAC? Public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. More transparent than private equity as these are registered offerings regulated by certain SEC rules. Provides liquidity to investors. Unit structure allows investors to correspondingly increase or decrease their risk return profiles. Rights of stockholders to vote in approval or rejection of the deal. Ability for investors to regain most of their funds if no deal or stockholder elects to convert. Opportunity for individuals to participate in takeovers of private companies. 8
A SPAC is: So basically, a SPAC is an entity which raises a cash pot from the public and says: Trust me I ll find something good to do with it or I ll give it back. 9
Statistics The Extent of the SPAC Phenomenon Since the 1990s, SPACs have existed in the technology, healthcare, logistics, media, retail and telecommunications industries. Since 2003, SPAC public offerings have sprung up in numerous industries, and in high-growth, emerging markets like China and India. 10
Funds Raised by SPACs 11
Some further statistics In 2007, 43 of 46 transactions that went to vote were completed As of April 2008, 14 transactions came to vote of which 6 were approved. 12
So SPACs are out looking for deals Companies are out looking for cash and public market exposure
So is this a deal made in heaven?
Process Typically, SPACs like to keep options open and will enter into a number of non-binding MOUs to see what plays out Determination of structure: Who will be the surviving entity Target (Israeli) company could be survivor» Considerations FPI (Foreign Private Issuers)» reporting, short swing profits» If the idea is to keep the cash in the company, it will be a share exchange. Negotiation of definitive acquisition agreement: 15
Process (continued) Preparation of proxy / Registration documents (F-4, S-4) Israeli securities law considerations whether target is acquirer or acquiree SEC Review Road show Shareholder Approval 16
Are you ready? This is your IPO. So if you are not ready for an IPO, you seriously need to consider if this is the best deal for you, considering your other options/alternatives. 17
Getting Ready- Considerations Sales Management depth Financial reporting processes and structures SOX. 18
Getting Ready (continued If target is survivor need to prepare it for being a public company Corporate housekeeping Articles Shareholder agreements / directors Indemnification and insurance Director and executive remuneration Equity plans External directors Registration rights If SPAC survives same issues, but perhaps less work. SPAC is already public and some issues have been addressed. But needs review. 19
Selling the Deal There is no deal if the SPAC stockholders don t approve. So you have to sell it Statistically most shares change hands between announcing deal and the shareholder meeting So basically, you re doing an IPO process road shows, the whole 9 yards What do you need? Good story, good price, good (properly tailored ) bankers Methods of ensuring shareholder approval Buying shares company, underwriters, shareholders. Problems tender offer 20
Be Prepared! - Timing You ll need 9 12 months! MOU Deal Structure Definitive Agreement Proxy/ Registration Document Road Show SEC Review Shareholder Meeting Leave time for SEC review otherwise can t negotiate. 21
SPACs and Reverse Mergers with Public Shells Similar to a reverse merger But, unlike reverse mergers SPACs come with a clean public shell company Better economics for the management teams and sponsors Certainty of financing/growth capital in place, A built-in institutional investor base and An experienced management team. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing shell companies in reverse mergers. 22
SPACs and Blank Check Companies Rule 419 of the Securities Act imposes certain obligations and restrictions upon issuers that are deemed to be "blank check" companies, including: Proceeds from IPO to be held in escrow until the issuer completes a business combination All of the Blank Check company's securities must also be placed in escrow until the completion of the business combination and no trading in the securities until they are released from escrow (no liquidity) Limited lifetime (18 months). 23
Rule 419 of the Securities Act (continued) Rule 419 does not apply directly to SPACs thanks to a loophole in the definition However, the structure of a SPAC generally tracks most of the requirements of Rule 419 (typically included in the organizational document or offering related documents), to provide a certain level of investor protection. 24