IPO proceeds are placed in a trust that earns interest. In addition, there are a number of tax challenges and complexities for financial statement and tax reporting purposes that should be considered up front. SPACs, explained - The Verge For federal income tax purposes, the warrants received are treated as investment warrants as long as the issuance of the warrants is not dependent on the sponsors employment status or in exchange for services provided as an employee of the SPAC. Securely download your document with other editable templates, any time, with PDFfiller. For one, the target equity holders will suffer a measure of dilution on account of the founder shares and private placement warrants in the surviving company held by the sponsor and any PIPE investors, and on account of the warrants issued to the SPAC IPO investors. However, if additional public shares or equity-linked securities (defined as securities of the SPAC or its subsidiaries that are convertible into or exchangeable for equity of the SPAC) are issued in connection with the closing of the de-SPAC transaction (excluding shares and equity-linked securities issued to the seller of the target business), the exchange ratio upon which the founder shares convert to public shares will be adjusted to gross the founder shares up to 20% of the total founder shares and public shares and equity-linked securities outstanding. After announcing a letter of intent last week for a potential business combination, BurTech Acquisition today in an 8-K disclosed it has secured non-redemption agreements for 4 million of its shares. The targets partners exchange their partnership interests for publicly traded shares. Historically, SPAC Sponsors needed to raise an amount to serve as risk capital or "sponsor capital" equal to between 3% and 5% of the projected public capital raise for the SPAC. Psyence Biomed, also referred to as "Psyence Therapeutics", is a division of Psyence, which is developing natural psilocybin medicinal formulations and treatment protocols for the treatment of. Try Now! The sponsor receives a percentage of shares at the time of the offering normally 20% which are put in escrow pending consummation of a potential acquisition within a two-year period. Additionally, the IPO prospectus will typically include a statement that the SPAC will not consider a business combination with any company that has already been identified to the private equity group as a suitable acquisition candidate. PDF Raising Capital in the Current Environment If a business combination is not consummated, the deferred 3.5% is not paid to the underwriters, and instead, that amount is used with the rest of the funds in the SPACs trust account to redeem the public shares. In certain circumstances, such as the absence of an effective registration statement covering the common stock issuable upon exercise of the public warrants or at the option of management, the public warrants may also be net settled. To attract capital, the sponsor must be a sophisticated and experienced investor that is well known in private equity circles and the financial markets. Study Manager - Epidemiology Operations Unlike an investment in the IPO of a typical operating company in which the IPO stock price may rise or fall after the IPO, an investment in a SPAC IPO benefits from downside protection through the closing of the business combination. The criteria that will inform the search include: For founders or investors in a pre-IPO company, an initial public offering has traditionally been regarded as one exit strategy of choice. The trust agreement typically permits withdrawals of interest earned on the funds held in the trust account to fund franchise and income taxes and occasionally permits withdrawal of a limited amount of interest (e.g., $750,000 per year) for working capital. Of the sponsor capital, the initial underwriting fees of 2% of the SPAC and the costs of the IPO will be deducted at the closing of the IPO, and the remainder will . Both the Nasdaq and the NYSE require as well that independent directors comprise a majority of the board, and that the SPAC have an audit committee and compensation committee made up of independent directors. Being an offshore SPAC may allow for a more efficient structure following the de-SPAC transaction, if foreign assets are acquired. We do so with your approval. Private equity managers contemplating sponsoring a SPAC face unique considerations, including where the sponsor should reside in the fund structure and whether the fund documents permit the formation of a SPAC. The restrictions apply to SPACs and former SPACs for varying periods depending on the specific rule. Since a SPAC is not operating a business, the SEC staff review can be more streamlined, and the SPACs registration statement will take considerably less time than an operating companys registration statement to be declared effective. For example, the warrant agreement can be amended by a vote of the warrant holders, the registration rights agreement can be superseded by a stockholders agreement, charters and bylaws are often amended, etc. The per unit purchase price is almost always $10.00. The letter agreement may include, among other things, a voting agreement obligating the officers, directors and sponsor to vote their founder shares and public shares, if any, in favor of the De-SPAC transaction and certain other matters, a lock-up agreement, an agreement from the sponsor to indemnify the SPAC for certain claims that may be made against the trust account, an obligation to forfeit founder shares to the extent the green shoe is not exercised in full, and an agreement not to sponsor other SPACs until the SPAC enters into a definitive agreement for a De-SPAC transaction. The offerings of the founder warrants and the shares issuable upon exercise of the public warrants and founder warrants are not registered at the time of the IPO, but are typically subject to a registration rights agreement entered into at the time of the IPO that entitles the holders of these securities to certain demand and piggyback registration rights after the De-SPAC transaction. The offshore structure will introduce other tax issues, such as passive foreign investment company issues. SPAC sponsors and insiders ("initial shareholders") typically purchase an initial stake of "founder shares" in the company for a nominal amount before the IPO. In addition to understanding the benefits of using a SPAC, it is important that SPAC sponsors and shareholders of target companies understand and plan for the federal income tax consequences associated with SPAC structures. After a record-smashing 2021, 2022 will be remembered as the year of diminished dealmaking. At formation, sponsors usually purchase (1) whole warrants in the SPAC ("sponsor warrants") for an amount of cash equal to the IPO expenses, plus a specied amount for future operating expenses of the SPAC, and (2) shares of common stock of the SPAC ("sponsor shares") for nominal consideration equal to 20% of the post-IPO share count. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. Once the SPAC is public, the SPAC must identify potential acquisition targets, undertake due diligence, and complete the acquisition (known as the de-SPAC transaction) on terms that will maximize the sponsors return on investment. Sponsors may reduce their exposure by having institutional investors purchase a portion of the at-risk capital. SPACs are required to have a majority of independent board members under stock exchange listing requirements, subject to the same phase-in exceptions as are applicable to all newly public companies. Inside M&A Fall 2015 | View Full Issue - McDermott Will & Emery (go back), 2Other investments raise Investment Company Act considerations for the SPAC during the period before it completes its De-SPAC transaction, as well as risk issues around whether the trust account will have sufficient cash to return $10.00 per public share to public shareholders on a redemption or liquidation. PIPE transactions have ranged from $100 million to billions of dollars, and are funded at the closing of the business combination with the target. Most SPACs list on the Nasdaq Capital Market, but there are those that list on the New York Stock Exchange. A portion of the proceeds from the sale of the private placement warrants equal to or greater than the amount of the upfront underwriting discount will be deposited in the trust account, so that the aggregate amount of cash in the trust account equals 100% or more of the gross proceeds of the IPO. Many have been chief executive officers of public companies, M&A dealmakers and industry experts. Ex-10.6 In most cases, a vote of the shareholders of the SPAC will be solicited to approve the business combination transaction with the target. Google signed an agreement with an Iowa wind farm to buy 114 megawatts of power for 20 years. The underwriters also have another role to play. This provides compensation to the independent directors for their service, as independent directors are typically not otherwise paid for their service. There is also inherent uncertainty as a result of the SPAC investors' redemption rights, which could result in the surviving company having insufficient cash to fund its operational needs of the surviving company or a shortfall in the cash consideration, if any, owed to the selling stockholders. SPACs are formed by sophisticated financial practitioners, alternatively referred to as sponsors or founders. Thank you. Northern Star III and IV Add to Non-Redemption Agreements Rushing through the process without the right expertise can put a successful outcome at risk, not to mention loss of funding and reputation of the sponsors. SPAC overview and lifecycle. For example, in several recent SPAC IPOs, the sponsor transferred between 30,000 and 40,000 founder shares to each of the SPACs independent directors. In all cases, only whole warrants are exercisable. The SPAC enters into a registration rights agreement with the sponsor and any other holders of founder shares and founder warrants (typically the SPACs independent directors), giving the sponsor and such other holders broad registration rights for the founder shares, founder warrants and other equity the sponsor and such other holders own in the SPAC. Under stock exchange listing rules, if a shareholder vote is sought, only shareholders who vote against the De-SPAC transaction are required to be offered the ability to redeem their public shares, but SPAC charter documents typically require the offer to be made to all holders. If there is unsolicited interest from potential targets, the SPAC and its officers and directors should refuse to engage and should respond that they will not consider the potential target until after the IPO is completed. Pricing is complete once agreements are executed for the business combination transaction and the PIPE, which can occur within four to six weeks after signing of a letter of intent. All organizational and offering expenses are paid by the SPAC from proceeds of the IPO and sale of the founder shares and founder warrants. Unlike the public shares, the founder shares are subject to contractual transfer restrictions, and their resale would either need to be registered under the Securities Act or be made in reliance on an exemption from registration. Complete a blank sample electronically to save yourself time and money. The sponsor pays a minimal amount, typically $25,000, for founder shares, referred to as the promote. Office Depot AlaskaFunding amounts range from $5,000 to $20,000, and PDF Spac Transactions In The United States - Cravath If the public warrants are exercisable and the public shares trade above a fixed price (usually $18.00 per share) for a period of time, the public warrants will become redeemable by the company for nominal consideration, effectively forcing holders of the public warrants to exercise or lose the value of the warrants. Use of public company stock to fund add-on acquisitions. The sponsor of the SPAC will purchase warrants in an amount equal to the 2.0% upfront underwriting discount of the IPO (see below), plus funds to cover the offering expenses and expenses to find a target, with the aggregate price of the purchased warrants in most recent deals hovering between 2.3% to 3.0% of the gross IPO proceeds. 10 Key Questions And Answers About SPACs - Forbes It is important to note that if the target is an S corporation, its S status will terminate in the de-SPAC transaction since a SPAC (which is taxed as a C corporation) is not an eligible S corporation shareholder. EX-10.16 12 rubicontech_ex10-16.htm EXHIBIT 10.16 . For that amount, the sponsor purchases founder warrants at a price of $1.50, $1.00 or $0.50 per warrant, depending on whether each unit sold in the IPO includes 1/3, 1/2 or 1 public warrant, respectively.