Special Purpose Acquisition Company

MG Law Office, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ana Kochiashvili, Tamar Jikia, associate Mariam Kalandadze, junior associates Ana Jikia, Lasha Machavariani and Nino Sakvarelidze, is partnering with Georgia Today on a regular section of the paper which provides updated information regarding significant legal changes and developments in Georgia. In particular, we highlight significant issues which may impact businesses operating in Georgia.

A special purpose acquisition company (SPAC), origins of which can be traced to the 90s US, has started to regain its momentum and popularity.

What is SPAC?

  • As a non-traditional way of taking company public, SPAC is the shell company generally formed by the experts of the field, is often referred to as the “blank-check company”and has no assets of its own.
  • Based on the SPAC IPO, SPAC company obtains the investors’ funds with the promise of acquiring a company (Target Company), merging with it, and thus transforming itself into a traditional publicly traded firm.

Why SPAC?

If in its classical form, IPO entails investing in the company based on the process of due diligence, roadshow and an overall scrutiny of the company, SPAC IPO is an investment in the reputation of the people involved in the SPAC and the promises that the SPAC founders provide.

During the SPAC IPO, Target Companies go through a much faster and a cost-effective path towards becoming a publicly traded company. Upon the selection by the SPAC sponsors and approval by its shareholders, Target Company merges with the SPAC public company, this way itself becoming a publicly traded company.

The full process of SPAC IPO and Target Company acquisition may be divided into the following stages:

  1. Creating SPAC
  • SPAC sponsors or founders are generally well known. Even though their area of expertise is not limited to any particular one, occasionally SPAC sponsors include businessowners, managers etc.
  1. SPAC IPO
  • SPAC company becomes a publicly listed company. As it has no assets, it does not go through the same stringent and lengthy scrutiny as any other traditionally formed firm;
  • Majority of the funds obtained during the IPO is held in the escrow account and is generally invested in the low risk governmental bonds.
  1. Identifying the Target Company
  • SPAC sponsors (founders) generally select a specific industry and within approximately two years post-IPO find and acquire the company using the money obtained via SPAC IPO;
  • Interestingly, if within two years (or any other set time frame) post-IPO, SPAC sponsors are unable to locate the target company, the funds received during the IPO are given back to the investors. Although this is not as common as generally SPAC sponsors tend to stay on the agreed course.
  • If required for the purposes of the acquisition/merger, SPACs may bring in additional investors, known as PIPE - Private Investment in Public Equity (PIPE).
  1. SPAC Merger with Target Company
  • Prior to the merger SPAC Sponsors seek for the shareholder’s approval and provide details on the suggested merger, governance questions, financial evaluation of the company, risks etc. Generally, merger requires an approval of the %70 of the shareholders.
  • Upon the Merger, SPAC becomes the traditional public company; It occasionally changes its name to the name of the company it has merged with this way allowing the Target Company to become a public company via the merger.

If we were to observe the US IPO market in numbers:

  • A general amount of the IPOs in 2020 was 450 with SPAC IPO’s representing 248 and thus 55% of all IPOs.
  • In terms of monetary evaluations of 2020, out of total $179 billion, $83 billion has been raised by the SPAC IPO’s.
  • Interestingly in the beginning of 2000s, SPAC IPOs have comprised a mere 1% of all IPOs.

Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

MG Law is the first full-service law firm in Georgia to be founded by international partners. The firm advises a diverse group of Georgian and foreign companies, financial institutions, investment funds, governments, and public enterprises.

Among many other areas, the firm primarily focus on the following sectors: Banking & Finance, Capital Markets, Arbitration & Litigation, Labor & Employment, Infrastructure and Project Finance, Energy Law, Real Estate, Tax and Customs, Investment Law, Corporate Law, and Cryptocurrency & Blockchain.

For more information, please visit www.mglaw.ge or contact Archil Giorgadze at archil.giorgadze@mglaw.ge and Nicola Mariani at Nicola.mariani@mglaw.ge

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