Hussain Qazi: Facilitator SBR|AFM|FM

SPACs. LISTING
Special Purpose Acquisition Cos.

SPAC Listing: A Shortcut to Listing, Popularly Known as BLANK CHECK.

SPACs, are a public shell companies that have no business or assets but are designed to raise money through an
IPO, and then later use that money to merge with or acquire a private, operating company.

Shell Cos: It has no asset other than cash, nor does it have a clear goal, product, or service. For SPACs the only
purpose is for listing the target (PVT) co., or otherwise become liquidate.

The raising of money to later buy a company has led to SPACs being called “blank check” companies.

SPACs LISTING Model: How Does it Works?

Listed SPACs + Target Co. (Operational) = Listed Successor Cos (Public listed operating cos.)

3 Steps Model:

1. SPAC Formation (Shell Co.): Through IPO

2. Search for Target Co.
3. De-SPACing: Target (PVT Co.) Merge with Public Shell Co.

1st Step: SPAC Formation (Shell Co.): Through IPO

A SPAC is formed by professional sponsors which undergoes an IPO to become listed, known as Shell Co. These
professional sponsors have relevant industry experience who provide the initial capital prior to the SPAC being
listed. These people are known as the SPAC sponsors.

2nd Step: Search for Target Co.

The purpose of the listing is to raise sufficient funds from other investors to acquire a controlling stake or
purchase outright an existing private company in a target industry, although at the time of the IPO, the target
company is often unknown to investors.

(Even though there is usually a target industry in mind when the SPAC is formed, there is typically enough
flexibility built into the agreement to allow opportunities in other sectors to be pursued too).

After the SPAC has obtained a listing, it normally has up to two years to identify a suitable target or it is closed
down and the funds are returned to the investors.

3rd Step: De-SPACing:

Once Target (PVT) Co. identified, approved by SPACs equity share holders and all other acquisition matters
completed, then merge the target Co. with Public Shell Co. This merger is called De-Spacing. This happens when
a target private company merges with an existing public shell company that was formed as a SPAC.

The model is actually another way for a private company to become publicly traded by merging with an already
listed SPAC, and avoiding IPO route.
Hussain Qazi: Facilitator SBR|AFM|FM

More Knowledge

1. SPACs professional sponsors are institutional investors and underwriters only to raise capital through an
IPO to acquire or merge with an existing target private business.
2. Generally, SPAC sponsors invested 20% capital (at a discounted price) and the remaining 80% capital offer
and held by shareholders though “units” offered in an IPO of the SPACs shares.
3. If the SPAC Co is not able to identify and acquire/merge target co within two years (the designated
timeframe), the SPAC is required to:
 liquidate and return the funds raised (held in an interest-bearing trust account) to investors; OR
 Seek the shareholders’ approval for an extension.
4. Once SPACs goes public, the funds raised are preserved in a trust account (invested in permitted
securities, like government securities, money market instruments.) until concludes a deal or fails to do so
within two years.
5. SPACs don’t have any commercial operations, business model and product or services to sell. The only
purpose is for listing the target (PVT) co., otherwise liquidate.
6. Real Life Illustration: SPACs were very popular in the 2020 initial public offering (IPO) markets. Companies
like DraftKings (DKNG), Nikola (NKLA), and Virgin Galactic (SPCE) have made headlines and drawn the
attention of investors. In the year 2020, more than $83 billion were raised/invested in SPACs
Hussain Qazi: Facilitator SBR|AFM|FM

SPAC Listing: Advantages

1. Faster Execution. SPAC transaction can take significantly less time to complete compared to an IPO,
usually within three to six months, while IPO usually take 12-18 months.
2. Lower Cost. Once acquired, the target company becomes a publicly traded company without paying the
fees and underwriting costs associated with an IPO.
3. Compliance Easiness: The target company also sidesteps the legal and regulatory obstacles associated
with an IPO and the need to generate interest amongst potential investors since the SPAC is already listed
when the deal is executed, which saves further time and expenditure.
4. Upfront Price Discovery/Greater Certainty: With an IPO, the share price depends on the market conditions
at the time of the listing whereas with a SPAC transaction the target company is in a position to negotiate
before the deal is executed. This provides greater certainty about the pricing of the shares. In theory, the
target company will therefore not have to worry about the funds raised being insufficient. (In a volatile
market, this can be a key advantage compared to an IPO and might explain the significant growth in SPAC
transactions during the early stages of the pandemic.)
5. Access to Operational Expertise: The SPAC sponsors typically include individuals with relevant financial
and industrial experience, who can draw on their expertise and even take on a role themselves on the
board. The SPAC sponsors may also have experience of listing requirements and therefore in theory may
be in a position to guide the target company through the process, including any post-admission
compliance issues.
Hussain Qazi: Facilitator SBR|AFM|FM

SPAC Listing: Challenges

1. Capital Short Fall From Potential Redemption: The SPAC is obligated to put the potential merger to a
shareholder vote. The SPAC shareholders normally have a right to redeem their shares and have their
funds returned if they do not approve of the final business combination. The SPAC may then have to turn
to the debt markets or raise additional equity to make up the shortfall, which will cost further time and
money.
2. Assess creditability of Sponsors. The target company will need to do thorough due diligence on the SPAC
sponsors and advisors. This will involve investigating the sponsors’ track record and the source of the
funds raised and ensuring the merger agreement does not contain any terms and conditions which are
detrimental to the target company. It will also be important to ensure the shell company was set up
properly and is compliant with regulatory requirements.
3. Change of Target Co management during negotiation. The terms of a SPAC transaction are negotiated
between the SPAC sponsors and the target company. Depending on the outcome of those negotiations,
there may be changes made to the target company’s management team. This contrasts with a traditional
IPO, where an offering is typically built on the reputation and success of the historical management team.
Any change in the composition of the management team may result in cultural or strategic dissonance
which could lead to a failure in execution
4. Compressed Timeline For Target Co. Readiness: Although one of the main advantages of a SPAC is to be
able to achieve a listing within a compressed timeline, but target company going public must meet the
same regulatory requirements as any other public company, regardless of the route to market. Although,
the SPAC sponsor may help with the regulatory and compliance issues but in practice the target company
often takes on most of the burden and within a much shorter timeline.
5. SPAC Returns Might Lower Than Expected: SPAC listing merger might not perform SPAC transactions
seem to have added value to shareholders, there is evidence to suggest that many SPAC transactions
underperform relative to initial expectations. One of the possible reasons suggested for the mixed track
record is that the knowledge and expertise attributed to the SPAC sponsors is sometimes overstated and
of limited benefit to the target company post-execution.
Hussain Qazi: Facilitator SBR|AFM|FM

Target Co can get advantage with SPACs

1. Better price deal because SPACs rule for limited time window to close an acquisition deal.
2. Increased market visibility: After the SPACs transaction the target co combine work with SPACs sponsors
who are likely experienced and well reputed in financial industrial markets.

More Knowledge: Click the video

https://youtu.be/40IywkBBcQQ?si=d8CUaX1w0eboG8tn

AFM Exam Possibilities:

1. SPACS Knowledge, How it works?

2. SPACS comparison with IPO (Pros & Cons.)
3. With the exam question you must have to identify your position, either the entity as SPACS or Target Co.
4. Don’t forget the application of the knowledge is a key for the success of AFM
 Hussain Qazi: Facilitator |SBR|AFM|FM|

DUTCH AUCTION
Price Discovery Process
What is Dutch auction?

The Dutch auction allows public and private companies to sell assets and securities on their terms. It is the
“price discovery process” of finding the optimum price at which the company wants to sell its shares (or
other securities) and the purpose is to minimise the potential for mispricing in an IPO.

Once the company has decided the number of shared it wishes to sell then the company (seller) establishes
an opening price that steadily decreases until a bid (quantity and cost) is placed. Unlike typical initial public
offerings (IPOs), the Dutch auction strategy work without underwriters or investment banks.

Dutch Auction Process

Terms

Offer price = Seller = Here the company selling their shares

Bid price = Buyer = Here the potential investor to buy shares
The seller determines the number of shares to be sold and the opening price,
Bidder (potential buyer) determine the selling price.

Auction Process
 Sell sets the quantity and opening prices of shares.
 The auction begins by seller with the highest offering price once all bids (quantity and cost)
have been submitted that continue to decrease until all shares have been sold.
 When the price reaches an optimal level, the auction ends.
 Finally, the lowest bid becomes the offering price for all shares, which all investors must pay.

Example

A public entity wants to sell 1 million shares to investors, and hence, it opens the bids for them. Here are
the bids placed:

 Investor A for 100,000 at $65 each

 Investor B for 200,000 at $60 each
 Investor C for 400,000 at $50 each
 Investor D for 100,000 at $70 each
 Investor E for 200,000 at $60 each

The entity chooses the lowest bid with the highest number of shares and finalizes selling the shares at $50
each. As a result, the shares become available to all investors at the lowest rate even though they have
placed higher bids.

Since all bidders will pay the same share price it means some bidders may end up paying less than the
amount they were initially willing to pay. However, at least in theory, the price is set at the maximum level
which ensures demand equals supply and the entire share offering is sold.
 Hussain Qazi: Facilitator |SBR|AFM|FM|

Real life illustration

In 2004, Google sold approximately 20 million shares with at least five bids. The aim was to enjoy short-
term gains from trading securities. In addition, it allowed its loyal customers some ownership as part of its
reward program. Another reason behind the Google Dutch auction was to build a strong shareholder
base.

Companies frequently utilize this strategy to go public but do not want underwriters to set the rules.
Unlike traditional IPOs, this technique doesn’t necessitate underwriters or investment banks.

The final share price for the IPO is based on the highest price at which all the shares can be sold.

Dutch Auction: Advantages

 Saving in transaction cost: Dutch offer offers a chance to company to go public without taking the
help of underwriters or investment banks, thus reducing transaction costs.

 Democratizing public offerings: In IPO, the underwriter will market the offer to institutional
investors first and retail investors are only allowed to participate after the company is admitted to
trading. However, Dutch auctions allow retail investors to compete against the institutional
investors because shares are sold to the highest bidder, effectively democratising public offerings.

 Price Transparency: Public bidding increases price transparency

 Lower Spread: There is evidence to suggest that Dutch auctions may result in a premium being
paid to the issuing company compared to the proceeds from a more traditional IPO. This reduces
the spread between the final offer price and the actual market price on the first day of trading.

 Investor (Bidder) Benefit: Multiple investors bid for their number of shares, and each investor
remains unknown of the other’s bid. They all place a bid that is favorable to them. As a result, all
investors benefit when the seller selects the lowest bid.
 Hussain Qazi: Facilitator |SBR|AFM|FM|

Dutch Auction: Real Challenges

Risk of Shares Unsubscription

In IPO, the underwriter will market the offer to institutional investors first and retail investors are only
allowed to participate after the company is admitted to trading.The share offer price in a traditional IPO is
determined by the issuing company and its underwriter, typically following a roadshow where the shares
are marketed to institutional investors.

In a Dutch auction, the underwriter loses this ability to direct the share price because ultimately it is the
potential investors who determine the final price since this is fixed by the market at a level which
maintains the balance between supply and demand.

In exactly the same way that a traditional IPO can be undersubscribed, the possibility remains that the
listing based on a Dutch auction will also be unsuccessful if demand is weaker than anticipated.

Risk of share prices to plummet.

Retail investors are less sophisticated than institutional investors and may not conduct sufficient due
diligence on the issuing company. There is therefore a risk they might pay an excessively high price. As a
result, they may attempt to liquidate their holdings as soon as trading commences and cause the share
price to plummet.

Auction-based pricing gives investors less control.