In 2003, Nussbaum, now running EarlyBirdCapital, determined the time was right to bring back SPACs. I don’t think he could have known what he was starting. Although he is still one of the most prolifi c players in the market, he has helped create a cottage industry. Many brokerage fi rms specializing in small- and mid-cap stocks either are planning a SPAC, have already completed one, or are actively participating in one. FIGURES 14.1
and 14.2 illustrate the variety of investment banks, investors, and attor- neys active in the recent SPAC movement.
Nussbaum’s biggest challenge in the new millennium was convincing Nasdaq to allow the stock of the fi rst new SPACs to trade on the OTC Bulletin Board. In the 1990s, shells routinely were granted the right to trade over the counter. In the early 2000s, however, an unoffi cial ban on allowing new shells onto the OTC Bulletin Board went into effect. We hear, however, that some shells (other than SPACs) recently have been permitted on, which is a positive development.
Although I do not know the details of Nussbaum’s discussions with Nasdaq, my understanding is that it required quite a bit of high-level arm- twisting to convince Nasdaq that, primarily because of the large amount of money being raised and the high quality of management, the legitimacy
of the SPAC and its anticipated trading market should be respected. To his credit, these discussions opened the door for all others to follow. More re- cently, a number of SPACs have been permitted to trade on the American Stock Exchange as well. This is signifi cant because no state blue sky review
FIGURE 14.1 Trading SPACs (as of January 1, 2006)
Q1’04 Q2’04 Q3’04 Q4’04 Q1’05 Q2’05 Q4’05
0 5 10 15 20 25 30 35 40
Q3’05 4
7 9 11
16 19
30 35
FIGURE 14.2 SPACs in SEC Registration (as of January 1, 2006)
2 3
21
1 2
21
41 40
0 5 10 15 20 25 30 35 40 45
Q1’04 Q2’04 Q3'04 Q4’04 Q1’05 Q2’05 Q3’05 Q4’05
1 IPOs
SPACs in Registration
3 3 4 3
14 8
3 3 3 4 3
Source: DealFlow Media/The Reverse Merger ReportSource: DealFlow Media/The Reverse Merger Report
Source: TKTK
of an IPO is required if a company is going to trade on the Amex (or Nasdaq or the New York Stock Exchange for that matter), since Congress preempted that regulation in legislation passed in 1996.
In Chapter 16, we will talk more about current trends in the SPAC market. Some things have changed in the SPAC market of today versus Nussbaum’s one-man industry in the 1990s. First, SPACs are now raising signifi cantly more money. Some now raise well over $100 million. Second, SPAC investors are becoming savvy and are forcing bankers to retool the commissions they receive for raising money. As a result, more underwrit- ers of SPACs are now agreeing to back-end a portion of their commissions until a merger with the SPAC is actually consummated.
Third, as Figures 14.1 and 14.2 show, major players including Deutsche Bank, Merrill Lynch, and Citigroup have begun to get active in the SPAC market, bringing greater legitimacy and, perhaps, a greater sense that this technique will be useful over the long term. Fourth, SPAC manage- ment teams are beginning to look like business A-lists. People like Steve Wozniak, one of the founders of Apple Computer, have joined SPAC teams. Is it just a matter of time before Jack Welch runs a SPAC?
The SEC has made life a little diffi cult for the new so-called SPAC- meisters. The examiners of SPAC registration fi lings have tried different tactics to put roadblocks in the way of this technique. All registration re- views were temporarily halted in early 2005 when a SPAC by the name of International Shipping Enterprises announced a merger deal only a couple of months after having gone public. The SEC believed that this meant conversations must have taken place with the target company prior to be- ing public. Since SPACs must confi rm in their fi lings that they have had no discussions with possible merger candidates before going public, this raised red fl ags at the SEC. If the SPAC had had such a target picked out in advance of going public, then disclosure of the target, its business, risk factors and so on, might have been required.
In addition, the SEC recently tried to question the treatment of war- rants which are purchasable by management, potentially creating another barrier to getting such deals public, although the rules for handling these warrants ultimately were resolved with an SEC no-action letter.
Nevertheless, the bankers and their attorneys generally have fought off attempts to stand in the way of SPACs, and the industry has sur- vived the various regulatory setbacks. The recent involvement of larger banks, and the simple fact that the SPACs are legal and permitted under SEC rules, means that, in the end, the SEC must allow them to continue. Maybe, as they did with other types of reverse mergers leading up to their June 2005 rulemaking, the SEC will begin to ac- cept that there are many legitimate players in SPACs who should be
Source: TKTK
encouraged just as the elimination of any bad guys should be aggres- sively pursued.
Who wins in the SPAC deals of today? Underwriters, of course, who may see as much as 7 percent of the money raised wind up in their pock- ets, along with commissions from trading the stock of the SPAC. Service providers such as lawyers, auditors, EDGAR-fi ling preparers, and transfer agents, also benefi t. The lawyers get a double hit—fi rst a fee to bring the SPAC public (this involves two law fi rms, one for the underwriter and one for the SPAC itself ), then another fee when the SPAC negotiates a merger and prepares a disclosure document that has to be approved by the SEC.
SPAC management teams benefi t as well. They receive some stock for their efforts, but they also often put their own money into the SPAC in order to have some skin in the game, as Wall Streeters like to say.
Investors also can win in the SPACs. They have very little downside risk prior to a merger. Hedge funds and institutions appreciate this facet of the structure. Also, there is real potential upside, as the few SPACs in the current market that have completed deals have generally seen good post- deal stock performance. Of course, the real test will come in the next few years, as the many SPACs now in registration or looking for merger deals watch the ticking clock and complete transactions.
Private companies looking to merge with SPACs can win because they see the ready cash. They also often benefi t from the guidance and advice of the SPAC management team. Many times the company merging in will retain some people from the former SPAC management to assist in build- ing their company.
The next section provides a more detailed discussion of the structural components of a SPAC and then the pros and cons of this rapidly growing technique.