Navigating the Transition: Unveiling the Dynamics of SPACs and De-SPACs

In the landscape of investment opportunities, SPACs (Special Purpose Acquisition Companies) and De-SPACs represent two integral parts of a listing process, despite their similar names. SPACs serve as the initial phase, while De-SPACs mark the subsequent transition.

Entering into the world of SPACs and De-SPACs illuminates a multifaceted landscape where investors and companies converge in pursuit of public market access and growth.

This journey offers an alternative route compared to a traditional IPO (Initial Public Offering), and holds significant importance for companies aiming for a liquidity event and exposure to public markets. Let’s explore these stages, examining how SPACs initiate the process and De-SPACs conclude it, all while taking into account the viewpoints of both investors and companies.

Understanding SPACs and De-SPACs

SPACs have emerged as a compelling avenue, offering an alternative route for private companies to enter the public markets. Established by a sponsor team, SPACs are essentially publicly traded entities initiated with seed capital and established with the primary objective of acquiring existing private companies and facilitating their transition to publicly traded status.

SPACs typically initiate their journey by raising capital through an IPO with the raised funds held in an interest-bearing trust account until suitable acquisition targets are identified. This unique process, known as a “reverse merger,” provides private entities with a faster and more streamlined path to accessing public markets compared to the traditional IPO route.

The sponsor team, comprising experienced investors or financial professionals, assumes the primary responsibility for structuring the SPAC and managing its operations. This team establishes a management team to supervise the process and identify appropriate target companies for acquisition (where the De-SPAC process begins). Commonly labeled as a “blank check company”, the SPAC holds funds in trust with predefined time constraints, typically between 9 to 24 months. These time limits, in many cases, can be extended if necessary. In the event that no suitable acquisition target is identified within this timeframe, the funds are returned to the investors, ensuring transparency and accountability throughout the process.

During the setup of the SPAC, there are opportunities for investments from various stakeholders at various points of the transaction. The sponsor team provides the initial seed capital, while public investors participate in the IPO.

Following the initial listing, De-SPACs represent the subsequent phase wherein management actively seeks out a target company and finalizes the merger. This streamlined process offers private companies an efficient alternative to the traditional IPO route, allowing them to merge directly with already-public entities. This direct merger approach not only accelerates access to capital but also affords greater flexibility in deal structuring, facilitating a seamless transition to public trading.

Economics and Advantages of Sponsors and Targets

Sponsor Advantages and Economics:

Launching a SPAC presents an enticing proposition for sponsors, requiring only a modest initial investment to secure ownership in a listed vehicle backed by Wall Street funding for acquisitions. The allure of acquiring assets using other investors’ capital is compelling, despite recent high redemption rates slightly tempering enthusiasm. Nevertheless, the opportunity to establish a listed company with relatively minimal financial commitment remains a key attraction.

Sponsors typically retain a significant stake in the SPAC, owning approximately 20% of the capital at the SPAC IPO. This ownership structure ensures that, even in the event of full redemption by investors, sponsors retain their shares and potentially control a larger portion of the combined entity. Crucially, regardless of redemption outcomes, sponsor shares remain unaffected, providing stability and confidence in their investment.

Target Advantages and Economics:

For target companies, the De-SPAC process offers a streamlined path to listing, characterized by greater certainty and cost-effectiveness compared to traditional IPOs, particularly when dealing with a friendly SPAC. By navigating the De-SPAC route, companies can position themselves for a smoother transition to public markets, leveraging the SPAC sponsor’s investor relationships and industry knowledge.

One of the primary advantages for targets lies in valuation. Unlike IPOs, where pricing tends to skew towards the lower end of the valuation range (as investment bankers want to see the shares trading up post-IPO), De-SPAC transactions afford companies the opportunity to justify valuations deemed fair by the parties involved (the SPAC sponsor and the target).

Moreover, the De-SPAC process mirrors IPO listing requirements and regulations closely, providing a familiar framework for both investors and regulators. The regulator sees a De-SPAC as a listed company (the SPAC) undertaking an M&A activity (in acquiring the target) rather than the target embarking on a fresh IPO. This means slight differences in disclosures, process, and structures to meet the listing requirements. This “democratization” of the IPO process, viewed as such by the SEC, encourages a “lighter touch” approach by the regulator, recognizing investors’ informed choices.

Furthermore, De-SPAC transactions present an additional opportunity to  attract capital from PIPE investors upon closing and merger, bolstering the financial resources available to the target company. This influx of capital, combined with the collaborative efforts of seasoned managers and investors, enhance the potential for value creation and synergies post-merger.

In essence, the De-SPAC process offers target companies a dual benefit of securing a listing while simultaneously accessing capital, streamlining their path to market entry and positioning them for sustained growth and success.

Real-World Examples

Consider two notable De-SPAC transactions facilitated by ARC Group:

1. Data Knights Acquisition Corp and OneMedNet Corporation

In a pioneering move, Data Knights Acquisition Corp. and OneMedNet Corporation initiated a groundbreaking SPAC transaction totaling $115 million, culminating in a merger.

Executed on November 8, 2023, this merger not only underscores ARC Group’s instrumental role in facilitating impactful mergers but also signifies a strategic pivot for OneMedNet. Transitioning seamlessly from SPAC to De-SPAC, OneMedNet strategically positions itself to leverage its innovative solutions within the vast $400 billion clinical market, thereby driving accelerated growth.

This strategic move illustrates the effectiveness of the SPAC-to-De-SPAC transition and highlights its potential to open up new opportunities and create value for shareholders. Read more about the transaction here.

 

2. Graphjet Technology and Energem Corp

Similarly, the merger between Graphjet Technology, an innovative biomass-to-graphite producer, and Energem Corp showcases the potent transformative force of De-SPAC transactions.

Taking center stage on Nasdaq, this merger marks the ascent of the globe’s foremost biomass-to-graphite producer. With an implied pro forma enterprise value hovering around $1.49 billion, this deal spotlights Graphjet’s strategic expansion efforts. The establishment of a cutting-edge manufacturing facility underscores Graphjet’s unwavering commitment to innovation, converting agricultural waste into valuable graphite and graphene commodities.

This transformative De-SPAC transaction showcases the potential of strategic partnerships to drive innovation and propel companies toward sustained growth and success. Read more about the De-SPAC transaction here.

In each scenario, the shift from SPAC to De-SPAC stands as a pivotal marker in the companies’ journey towards growth. Armed with their freshly acquired public status, they set out on strategic ventures aimed at amplifying shareholder value and propelling their enterprises to new heights of success. The transition from SPAC to De-SPAC involves a nuanced process characterized by meticulous planning, rigorous due diligence, and astute decision-making.

Ultimately, these transformative maneuvers pave the path for sustained expansion and prosperity in the public arena, encapsulating the essence of innovation and strategic acumen in corporate evolution.

Amidst the financial transformation, there is evidence of a notable cultural shift, demonstrating the adaptability and resilience of businesses in response to taking a company to the next level, from private to public capital markets. In this narrative of transformation, ARC Group stands out as a guiding presence, offering expertise and insight to illuminate the path forward. From the intricate negotiations to the transparent communication with stakeholders, every step embodies a commitment to excellence and a pursuit of success.

---

Read more about our experience in capital markets.