In Mintz’s recent article—“Public Benefit Corporations are Going Public,”—we predicted that, as Special Purpose Acquisition Companies (“SPACs”) reemerge as an alternative to initial public offerings (“IPOs”), Public Benefit Corporations (“PBCs”) would start going public through the SPAC process. Not surprisingly, two PBCs have recently done just that, and it seems certain that more PBCs will follow. It is important to note, however, that regulators like the U.S. Securities and Exchange Commission (the “SEC”) are increasingly focused on SPAC oversight, which may slow the frequency of SPAC transactions as regulators issue new guidance and enforcement measures.
As described in Mintz’s previous articles—“Can I Raise Venture Capital as a PBC?” and “What are My Exit Options as a PBC?”—a PBC is a legal corporate form created by the state of Delaware in 2013 that, among other things, codifies a company’s social mission. A PBC allows a board of directors to make business decisions based not just on the economic interest of the corporation’s shareholders (as required by the traditional C-Corporation corporate form), but based also on the PBC’s mission, which may focus on the interests of those materially affected by the corporation’s conduct, including employees, customers, communities and the environment. PBCs are gaining mainstream acceptance as societies and markets increasingly insist that corporations generate positive social impact alongside profits.
Parallel to the rise of mission-driven PBCs is the renewed popularity of SPACs, which have dominated the markets over the past two years as an alternative IPO-strategy for many companies interested in accessing capital. Mintz’s comprehensive report produced in collaboration with PitchBook, Breaking Down the SPAC Surge: A Review of Key Trends & Issues Defining the Phenomenon (the “Mintz SPAC Report”), highlights this trend. For example, in 2020, nearly $125 billion was raised across hundreds of SPACs with 123 SPAC mergers announced or closed for an aggregate of $59.3 billion.
The process of going public through a SPAC transaction can be faster, but is no less complex, than a traditional IPO. This is how the process works:
- First, founding investors (“Sponsors”) form and manage a shell company with no commercial operations formed to raise capital through an IPO (a “SPAC Entity”). The purpose of the SPAC Entity is to acquire or merge with an existing operating company (a “Target”) which allows the Target to become a public company. Sponsors purchase founder shares of the SPAC Entity for a nominal amount, which results in an approximately 20% equity ownership stake after the IPO.
- Second, the SPAC Entity raises capital through an IPO by issuing units comprised of common shares and warrants to investors, with proceeds held in a trust until the Target is acquired or the SPAC expires. After these two steps, the resulting public entity is a holding company with a pool of funds held in trust to finance the acquisition of one or more Targets.
- Third, after the SPAC IPO process, a SPAC Entity undergoes a “de-SPAC transaction.” Similar to a traditional M&A process, Sponsors vet potential Targets, and once a Target is identified, closing conditions often require a simultaneous private investment in public equity, traditionally known as a PIPE, to close the merger.
- Fourth, the Sponsors and shareholders of the SPAC Entity vote in favor of a transaction.
- Fifth and finally, the Target and the SPAC Entity merge and complete the business combination. The final three steps demonstrate that the merger transaction between the publicly traded SPAC Entity and the private company is a de-SPAC transaction, which results in (1) the shareholders of the private company receiving shares of the SPAC Entity and/or cash as consideration and (2) the private company becoming a publicly traded entity.
PBCs have begun to fill the demand for mission-driven companies in the public markets by engaging in SPAC IPOs and de-SPAC transactions. For example, according to ImpactAlpha, as of mid-March 2021, 31% of outstanding SPACs (based on deal value) pursue business strategies that are aligned either partially or entirely with sustainable investing strategies that include (1) social and environmental themes; (2) the achievement of impact; and (3) the integration of environmental, social, and corporate governance (“ESG”). Professor Christopher Marquis, the Samuel C. Johnson Professor in Sustainable Global Enterprise at Cornell University, discusses the link between SPACs and sustainability in his April 1, 2021 Forbes article, “New SPAC Sees Growing Market Opportunities For Stakeholder-Minded Businesses and Investors,” where he contends that the processes of both a SPAC IPO and a de-SPAC transaction can complement a PBC’s impact objectives:
“Demand for ESG and impact in public markets is rising in several ways. Public equity impact strategies experienced one of the most significant growth rates across all asset classes from 2014 to 2018, and sustainability-focused funds saw record inflows in the first quarter of 2020, particularly to mitigate risks amid the Covid-19 pandemic . . . But the availability of ESG-focused companies addressing global challenges are not increasing to match this demand.”
AppHarvest Inc. (“AppHarvest”), a PBC, engaged in a de-SPAC transaction by going public through a merger with a public SPAC Entity, Novus Capital Corp., on February 1, 2021, making AppHarvest the first PBC to engage in a de-SPAC transaction. AppHarvest is an agriculture technology company focused on building and operating “high-tech indoor farms to sustainably grow affordable, nutritious, chemical pesticide-free non-GMO fruits and vegetables at scale using 90% less water than traditional open-field agriculture and 100% recycled rainwater.” After AppHarvest and Novus Capital Corp. completed their merger in February 2021, the combined entity was renamed AppHarvest and now trades on Nasdaq Global Select Market. As a result of the transaction, AppHarvest received approximately $475 million of gross proceeds and over $435 million of unrestricted cash to fund operations. Since the completion of the merger in February 2021, AppHarvest’s trading price was as high as $38.21 and as low as $12.61 as of the publication of this article. On April 19, 2021, shares of AppHarvest entered into oversold territory, hitting an RSI reading of 28.3.
In addition, Sustainable Development Acquisition I Corp. (“SDAC”) formed as a SPAC Entity to acquire or merge businesses addressing global challenges identified by the United Nations Sustainable Development Goals, including businesses in the water, food, agriculture, renewable energy, and environmental resource management industries, and went public through a SPAC IPO on February 9, 2021, becoming the first PBC SPAC Entity. The Sponsors of SDAC, Renewable Resources Group and Capricorn Investment Group, each of which has dedicated their expertise and resources to investing in “market opportunities to create financial value, generate environmental and social benefits, address environmental, labor, or natural resource challenges,” raised approximately $316 million at the closing of SDAC’s upsized initial public offering of 31,625,000 units at a price of $10.00 per unit. SDAC is currently searching for Targets to merge with and to begin a de-SPAC transaction. SDAC’s units are currently traded on the Nasdaq Capital Market. Since February, SDAC’s unit price had a high of $11.45 and a low of $9.74, and closed at $10.12 as of the publication of this article.
As more PBCs go public either through SPAC IPOs like SDAC or de-SPAC transactions like AppHarvest, they should carefully address related risks. For example, a PBC going public through a SPAC will have to carefully and clearly draft its public filings with the SEC to describe not only the opportunities afforded to the PBC corporate form, but also the associated risk factors of the PBC, such as potential shareholder derivative litigation to enforce the PBC’s social mission. In addition, as Tom Burton, Mintz Member and Chair of the Energy & Sustainability Practice, discussed in “SPAC Chat Episode 3: Tracking Trends of the SPAC Surge” on the From the Edge: Insights on the Innovation Economy podcast, “the SEC has indicated that they are taking a look at this marketplace and trying to determine whether there ought to be any additional disclosure requirements.”
Not surprisingly, the SEC stated on April 12, 2021 that it will begin to examine the accounting principles that SPACs have used to classify their warrants. SPACs have typically classified warrants issued to investors during the capital raising process as equity on the SPAC’s balance sheet. However, under certain circumstances, the SEC has stated that some warrants should be classified as liabilities, which would require the SPAC to periodically account for changes in the warrants’ value. One possible adverse impact the SEC’s announcement is that affected SPACs would have to restate their financial results if the fluctuations are material. As a result of the SEC’s statement, the Wall Street Journal cautioned that the frequency of SPAC transactions has begun to decrease because “[c]ritical comments from regulators appear to be scaring off some investors and new offerings” in the April 16, 2021 article, “SPAC Hot Streak Put on Ice by Regulatory Warnings.”
While there may be challenges and risks associated with SPAC transactions and evolving regulatory oversight, there are also exciting opportunities for PBCs that go public through SPACs. For example, SPACs allow companies to go public without as much public scrutiny as a traditional IPOs, while also enabling PBCs to more quickly access capital for operations or expansion. In addition, a PBC that goes public through a SPAC can quickly reach a wide range of new investors and capital, as public investors are eager to support companies making a positive social and environmental impacts. Further, the PBC could see increased publicity for and awareness of their larger social mission. In this complex and exciting marketplace, however, mission-driven leaders hoping to go public through a SPAC transaction or through the traditional IPO process should seek out experienced counsel and legal advice.
 In addition to Delaware, 35 states and the District of Columbia have passed legislation allowing the formation of PBCs. See https://benefitcorp.net/policymakers/state-by-state-status.
Source: The National Review – Public Benefit Corporations and the SPAC Surge
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Beyond the fanfare and SEC warnings, SPACs are here to stay
The number of SPACs in the deep tech sector was skyrocketing, but a combination of increased SEC scrutiny and market forces over the past few weeks has slowed the pace of new SPAC transactions. The correction is an inevitable step on the path to mainstreaming SPACs as an alternative to IPOs, but it won’t cause them to go away. Instead, blank-check vehicles will evolve and will occupy a small and specialized — but important — part of the startup financing landscape.
The tsunami of SPAC financings sparked commentary from all corners of the capital markets community, from equity analysts and securities lawyers to VCs and fund managers — and even central bankers. That’s understandable, as more than $60 billion of SPAC deals have been announced since the beginning of 2020, plus $55 billion in PIPE capital, according to investment bank PJT Partners.
The views debated by finance experts often relate to the reasonableness of SPAC pricing and transaction structures, the alignment of incentives for stakeholders, and post-merger financial and stock price performance. But I’m not going to add another voice to the debate on the risk-reward calculus.
As the co-founder of a quantum computing software startup who worked in financial markets for two decades, I’d like to offer my perspective on two issues that I think my peers care more about: Can SPACs still solve the funding problem for capital-intensive, deep tech startups? And will they become a permanent financing option?
Keeping the lights on at deep tech startups
I believe that SPAC financings can solve a major problem for all capital-intensive technology startups: the need for faster — and potentially cheaper — access to large amounts of capital to fund product development over multiple years.
SPACs have created a limitless well of capital that deep tech startups are diving into. That’s because they are proving to be more attractive than other sources of financing, such as taking investment from later-stage VC funds or growth equity funds with finite fund sizes and specific investment themes.
The supply of growth capital from these vehicles has been astounding. In 2020, SPACs alone raised more than $83 billion via 248 IPOs, which is equal to a third of the total $300 billion raised by the entire global VC community. If the present rate of financings had continued, the annual amount of SPAC financings would have been on par with the total R&D expenditure of the U.S. government — roughly $130 billion to $150 billion.
This new supply of capital can let startups keep the lights on, helping them address a practical need while they develop products that may take a decade to field. Before SPACs, any startup that wanted to remain independent had to lurch from one round of VC financing to the next. That, as well as the intense IPO process, is a major time sink for management teams and distracts them from focusing on product development.
SPAC rumor mill churns over autonomous truck software developer Plus
Startup ‘open to all kinds’ of capital raising but mum on blank-check merger
Self-driving truck software startup Plus is reportedly in talks to merge with the same investor group that brought public electric vehicle startup Canoo Inc. (NASDAQ: GOEV), school bus maker Blue Bird Corp. (NASDAQ: BLBD) and flatbed logistics specialist Daseke Inc. (NASDAQ: DSKE).
Rumors of the Cupertino, California-based startup aligning with a special purpose acquisition company (SPAC) have circulated for months. Bloomberg reported Friday that Plus is in talks with Hennessy Capital Investment Corp. V (NASDAQ: HCIC) in a deal that could be announced as soon as this week.
“We’re very open to all kinds of methods to raise capital and provide resources for further development of our technology and company,” Plus co-founder and CEO David Liu told FreightWaves in a March interview. “We don’t comment on rumors.”
According to Bloomberg, Plus would be valued at more than $3 billion and raise $500 million to $600 million through Hennessy’s latest blank-check company, a shell that raises money from investors in an initial public offering to target a company for merger.
The latest Hennessy SPAC raised $345 million in a January IPO. More money could accumulate through a private investment in public equity (PIPE), where mutual and hedge funds purchase shares, typically priced at $10. They often receive a partial warrant for each share for later redemption at $11.50.
After a year and half in which more than 500 SPACs have launched, the Securities and Exchange Commission is scrutinizing warrant accounting and whether financial projections should get liability protection. Traditional IPOs are prohibited from making future revenue and profit projections.
Plus was founded by Liu and Stanford University classmate Shawn Kerrigan in 2016. Financial backers include Shanghai Automotive Industry Corp.,GSR Ventures Management and the Chinese long-haul company Full Truck Alliance.
Plus has raised $420 million in recent months, much of it from Chinese investors. It has a minority interest in a joint venture with Chinese-owned First Auto Works and begins production of Level 4 robot trucks in China this quarter. Each truck has a safety driver behind the wheel.
The latest $200 million funding round in February attracted new investors including Guotai Junan International Holdings and Citic Private Equity Funds Management Co. FountainVest Partners and ClearVue Partners co-led a $220 million expansion of the round in March.
Plus works with Chinese delivery company SF Holding Co., which uses its PlusDrive software stack on driver-monitored routes that can cover more than 900 miles a day. The company deals with four of the world’s top 10 truck makers, Liu said.
It recently signed a memorandum to work with Europe’s IVECO to equip its trucks with the PlusDrive system and is collaborating with Cummins Inc. (NYSE: CMI) to add its software to natural gas trucks made in the Cummins Westport joint venture.
Plus is one of at least six autonomous trucking software developers jockeying to lead in the technology that could eventually remove drivers from heavy-duty trucks operating on repeatable routes or in hub-to-hub arrangement.
Liu said that it could take billions of driver-monitored miles to assure driverless trucks are safe.
San Diego-based TuSimple Holding (NASDAQ: TSP) went public in April at a valuation of about $8 billion. Its shares have traded slightly below the $40 where they traded at their debut.
TuSimple operates 50 Level 4 software-equipped trucks with safety drivers that haul freight in the southwest U.S. It plans a fourth-quarter driverless pilot in Arizona. The company is developing a self-driving Class 8 truck with Navistar International Corp. (NYSE: NAV) targeting deliveries in 2024.
Others competing to lead include Alphabet’s (NASDAQ: GOOGL) Waymo Via, whose technology was adapted from the Google self-driving car project. It is developing its fifth-generation software system for Daimler Trucks (OTC: DDAIF). Aurora Innovation is working with Volvo Group (OTC: VLVLY) and PACCAR Inc. (NASDAQ: PCAR) on self-driving trucks. Startups Embark Trucks and Kodiak Robotics Inc. are deep in Level 4 technology testing and moving revenue-generating loads from Arizona to California and in Texas respectively.
Source: FreightWaves – SPAC rumor mill churns over autonomous truck software developer Plus
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Buffett Explains Why SPAC Mania Won’t Go on Forever
The model of deploying other people’s money is a recipe for wasting resources
At the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting this weekend, Warren Buffett (Trades, Portfolio) explained how growing competition among SPAC funds for deals would lead to the industry’s demise.
“It’s a killer. The SPACs generally have to spend their money in two years, as I understand it. If you put a gun to my head to buy a business in two years, I’d buy one,” Buffett said. “There’s always pressure from private equity funds.”
Special purpose acquisition companies, or blank-check companies, have grown in popularity on Wall Street in times of easy money. SPAC deals finalized in the 2019-20 period jumped 400%, according to Dealogic.
“That won’t go on forever, but it’s where the money is now, and Wall Street goes where the money is,” Buffett said. “SPACs have been working for a while, and if you secure a famous name on it you could sell almost anything.”
Buying a business in a rush isn’t the only thing that is wrong with SPACs. The whole model of raising acquisition funds without having a clear vision of what you want to buy and why you want to buy is in sharp contrast with the traditional acquisition process, as explained by Buffett in his 2020 annual letter to shareholders:
“Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable strengths, the capabilities, and the character of its management, and priceIf that strategy requires little or no effort on our part, so much better.”
In short, the SPAC model of deploying other people’s money is a recipe for wasting resources: buying the wrong company at the wrong time and for the wrong price.
Wall Street is littered with examples of such acquisitions.
Source: GuruFocus – Buffett Explains Why SPAC Mania Won’t Go on Forever
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‘SPACs Attack’ Recap: Looking Back At 5 SPAC Deals, Rumors And Top Headlines
The week kicked off with a large SPAC deal announced on Sunday, bringing a new global sports betting and online casino company public. Several other SPAC deals were announced throughout the week along with a couple rumors that could be worth a watch this week. Benzinga’s “SPACs Attack” covered the deals and news of the week.
Here is a look back at the announced deals, rumors and some top headlines.
On Sunday, online sports betting and gaming company Super Group Holding, the owner of Betway and Spin, announced a SPAC deal with Sports Entertainment Acquisition Corp SEAH 1.17% valuing the company at $4.75 billion. Super Group is licensed in 23 jurisdictions with plans to use its scale and technology to expand into additional territories. In the 12-month period ending March 2021, Super Group had over $42 billion of wagers and 2.5 million monthly unique active customers.
The company plans to expand the Betway brand in the United States. Super Group entered into an agreement with Digital Gaming Corporation for the rights to 10 US states. Betway has over 60 brand partnerships including the NBA’s Chicago Bulls, Golden State Warriors, Brooklyn Nets and Los Angeles Clippers.
Super Group had net gaming revenue of $1.1 billion in 2020 and EBITDA of $259 million. The company is estimating revenue to be $1.6 billion in fiscal 2021 and $1.8 billion in fiscal 2022.
Clarus Therapeutics announced a SPAC deal with Blue Water Acquisition Corp BLUW 0.5% valuing the company at $379 million. The pharmaceutical company develops metabolic therapies for men and women. Clarus said the acquisition will help accelerate the commercialization of JATENZO, a oral testosterone replacement therapy. Going public will also help the company fund additional items in its pipeline.
Enjoy Technology announced a $1.2 billion SPAC merger with Marquee Raine Acquisition Corp MRAC 0.2%. Enjoy has multi-year commercial relationships with customers including AT&T T 0.26% in the United States, BT Group in the United Kingdom, Rogers Communication RCI 0.92% in Canada and select Apple Inc AAPL 1.51% stores in the United States. Enjoy is led by founder and CEO Ron Johnson, who helped develop Apple’s retail stores and transform an omnichannel approach for Target TGT 0.2%.
The company says it has an edge on reaching customers in their homes that e-commerce brands cannot deliver.
End-to-end digital manufacturing company Shapeways announced a SPAC merger with Galileo Acquisition Corp GLEO 0.49% valuing the company at $410 million. Desktop Metal DM 6.05% invested in the PIPE on the deal and has a partnership with Shapeways. Targeting industries like medical, industrial, automotive and aerospace, Shapeways has 11 technologies for 90 materials.
The company has delivered over 21 million parts to 1 million customers in 160 countries. Fiscal 2020 revenue for Shapeways was $32 million. Estimates from the company call for revenue to hit $44 million in fiscal 2021 and $86 million in fiscal 2022. The company estimates revenue of $400 million in fiscal 2025 with less than 1% of the total addressable market.
Next-gen hospitality company Sonder announced a SPAC deal with Gores Metropoulos II GMII 0.4% valuing the company at $2.2 billion. Sonder operates more than 300 properties across 35 markets in eight countries. The company works with property owners to offer rentals to customers on a daily, weekly or monthly basis.
Sonder had revenue of $116 million in fiscal 2020. The company estimates revenue to hit $173 million in 2021 and hit $4 billion by the year 2025 led by a travel market recovery worldwide.
Financial media company Forbes is exploring a SPAC deal, Reuters reports. The company could also be sold in a bidding process that has attracted several companies. Forbes reaches an estimated audience of 140 million people with its digital platform.
Israeli cleantech company Tipa is considering a SPAC deal to go public. Calcalist reports the deal could value the company that develops compostable flexible packaging at $500 million.
Shares of Skillz SKLZ 2.34% started the week off strong with a defensive call coming from Ark Funds, which owns shares of the former SPAC. Skillz has been the target of several short reports. Ark is not bothered by the claims and believes the NFL partnership is a major catalyst for the company.
Luminar Technologies LAZR 7.48% announced a partnership with Airbus to test technologies for autonomous flight and obstacle detection. The two companies will work together on aircraft sensing and perception.
Landry’s CEO Tilman Fertitta said his restaurant group, which is merging with Fast Acquisition Corp FST 0.08%, will accept Bitcoin and other digital currencies. The CEO said 80% to 90% of the restaurants will accept cryptocurrency in the next 90 days.
Latch, which is merging with TS Innovation Acquisition Corp TSIA 0.1%, announced preliminary first quarter revenue. The company sees first quarter revenue growing 135% to 140% and bookings to be up 86% to 88% year-over-year.
The launch of Ultium Charge 360 by General Motors Company GM 0.94% saw the automotive giant partner with seven charging network companies. Among the partners are ChargePoint Holdings CHPT 1.44% and EVgo, which is going public with Climate Change Crisis Real Impact I Acquisition CLII 0.69%.
Apex Clearing announced first quarter net revenue growth of 98% year-over-year. The company saw customer accounts grow 85% year-over-year in the first quarter, hitting more than 14.4 million. The company is merging with Northern Star Investment Corp II NSTB.
Source: Benzinga – ‘SPACs Attack’ Recap: Looking Back At 5 SPAC Deals, Rumors And Top Headlines
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