Market Trends: De-SPAC Transactions

By: Jamie Payne, LEXIS PRACTICAL GUIDANCE

This article discusses recent market trends in de-SPAC transactions (acquisitions involving Special Purpose Acquisition Companies (SPACs)) in 2021, covering notable transactions, deal structure and process, and other key market trends.

SPACs and De-SPAC Transactions

A SPAC is a public shell company that raises funds through an initial public offering (IPO) and uses the proceeds to acquire a private company. This business combination is commonly referred to as a de-SPAC transaction. While a SPAC cannot know its target company at the time of its IPO, SPACs typically focus on a particular industry or geography in seeking targets for the business combination.

A de-SPAC transaction must be consummated within a designated time frame, usually between 18 and 24 months from the date of pricing the IPO. If the SPAC is unable to consummate a merger in the designated time frame, the SPAC is required to liquidate and return the funds raised in the IPO (being held in an interest-bearing trust account) to investors or seek approval from stockholders for an extension. Most de-SPAC mergers require additional financing, such as through forward purchase agreements with the sponsor, or through private investment in public equity (PIPE) transactions, wherein the SPAC issues new securities to institutional accredited investors contingent upon the closing of the initial business combination.

In 2021, SPAC IPOs and de-SPAC transactions reached record-breaking numbers. The number of SPAC IPOs increased from 248 in 2020 to 613 in 2021. The total SPAC IPO proceeds also increased from approximately $83 billion in 2020 to more than $160 billion in 2021.

There was a corresponding increase in the number of de-SPAC mergers after SPAC IPOs, although many existing SPACs have yet to identify target companies and complete a de-SPAC transaction. In 2021, 267 de-SPAC mergers were announced and 199 were closed. SPAC activity in 2021 was the highest it has ever been, but 2021 fourth-quarter indicators show that the SPAC market is trending towards a decrease in activity. 

The average size of de-SPAC transactions remained consistent between $2.2 billion and $2.8 billion in 2021 until a significant decline to $1.4 billion in the fourth quarter. The largest SPAC merger announced and closed in 2021, between Altimeter Growth Corp. and Grab Holdings Inc., was valued at $39.6 billion.

Many of the trends expected in de-SPAC transactions in 2022 will be related to both the high number of SPACs seeking acquisition targets in a competitive market and heightened regulatory scrutiny and oversight. At the end of 2021, 572 SPACs were in the market to complete a business combination, with an additional 270 SPAC IPOs still in registration. Although only one SPAC liquidated in 2021, as merger deadlines loom for SPACs that went public in 2020 and 2021, there may be an increase in liquidations if SPACs are unable to consummate a merger or obtain the required stockholder approval to extend the deadlines. While the acquisition opportunities become more competitive and the pressure to consummate de-SPAC mergers builds, the U.S. Securities and Exchange Commission (SEC) is warning of increased regulatory oversight. The number of shareholders exercising redemption rights in connection with merger approval votes is expected to continue increasing in response to stockholder uncertainty.

Recent Trends in De-SPAC Transactions

PIPE Financings

One key trend seen in de-SPAC transactions is the decreased use and size of PIPE financing in business combinations.

The number of de-SPAC mergers involving PIPE financing has steadily declined throughout 2021 from 91% in the first quarter to 75% in the fourth quarter. This is a decrease from the fourth quarter of 2020 when de-SPAC transactions with PIPE financing peaked at 94% of transactions.

The end of 2021 was marked with a decrease in total dollar value of pending de-SPAC transactions to $233.6 billion, the lowest it was during the year. This indicates a continued decline in equity value of SPAC mergers. As the equity value of SPAC mergers decreases, the role of PIPEs may also decrease.
PIPE investments help to both fund redemptions and finance the merger itself. The funds raised in the IPO are held in a trust account, and the terms of a SPAC require that before a de-SPAC transaction, the SPAC must offer its public stockholders the right to redeem their shares for the original purchase price, which funds are paid from the trust account. Due to this redemption right, there is uncertainty as to how many stockholders will redeem out (stockholders have the right to both vote to approve the merger while also redeeming their shares) and the resulting amount of cash available in the SPAC’s trust account at the closing of the de-SPAC transaction after redemptions are paid out. Obtaining PIPE financing helps to mitigate the risk that insufficient cash will be available for the de-SPAC transaction.

Earnouts

The use of earnouts in de-SPAC transactions continued in 2021. Nearly half of the de-SPAC transactions that closed in 2021 included earnouts as part of the merger consideration to target stockholders. In de-SPAC transactions, earnouts refer to the right of target company stockholders to receive additional equity if certain milestones are met, usually based on the combined company’s post-closing public stock price.

Of the de-SPAC transactions with earnouts, over 90% of the earnouts were tied to stock price milestones, while the other earnouts were based on the target company achieving a specific business objective (i.e., building a facility) and, in a few deals, a combination of a business objective and stock price milestone. The de-SPAC earnouts typically have multiple tranches, with a certain percentage of shares becoming available when the stock price reaches a specific threshold. In the Ginkgo Bioworks, Inc. merger, for example, the target stockholders were entitled to receive 188.7 million shares divided into four equal tranches if the trading price per share of the merged company common stock was greater than or equal to $12.50, $15.00, $17.50, and $20.00 for any 20 trading days within any period of 30 consecutive trading days during the five-year earnout period. At each threshold, the target stockholders would receive 25% of the earnout consideration. It is uncommon for de-SPAC transaction earnouts to be in the form of cash.

Redemptions

An increasing number of stockholders are exercising redemption rights at the time of the de-SPAC merger approval vote. The average rate of redemption increased significantly in the third and fourth quarters of 2021. In the fourth quarter, stockholders in more than 60% of de-SPAC transactions exercised redemption rights at a level above 50%. And, in 10% of those de-SPAC transactions, the rate of redemption was 90% or more. As more SPACs enter an increasingly competitive market and companies seek stockholder approval to extend merger periods, stockholders may respond to uncertainties by exercising redemption rights more frequently.

SEC Scrutiny

As recently as December 2021, the SEC indicated that SPACs will be part of its enforcement agenda in 2022. In 2021, the average time between signing and closing of de-SPAC transactions increased slightly from three months to five months. The interim period has increased in part due to heighted regulatory scrutiny.

At an Investor Advisory Committee Meeting held on March 11, 2021, Commissioner Allison Herren Lee, as the acting commission chair, noted a growing concern about SPACs and the potential increased risks to investors. Lee’s statements came one day after the SEC released an investor alert cautioning against investments in SPACs with celebrity involvement.

Then, in July 2021, the SEC announced its first notable enforcement action involving a SPAC, its sponsor, the target company, and the chief executive officers. The SEC announced charges against Stable Road Acquisition Corp., SRC-NI (the SPAC sponsor), Momentus Inc., and the chief executive officers of the SPAC and target company for misleading claims about the target company’s technology and national security risks associated with the target company’s CEO.

In December 2021, the announced de-SPAC mergers between (1) Digital World Acquisition Corp. and Trump Media Technology Group and (2) Churchill Capital Corp IV and Atieva, Inc. (d/b/a Lucid Motors), were each reported to be under regulatory investigation. The SEC cautioned it will continue to scrutinize de-SPAC transactions and consider additional regulation of SPAC activity. 

Sponsor Lock-ups

A continuing trend in 2021 is the nontraditional treatment of the sponsor founder shares, which may be another reflection of the increased competition for target companies and the SPAC’s intent to be an appealing merger partner. Traditionally, the sponsor pays a nominal amount (usually $25,000) for that number of founder shares equaling 20% of the total shares outstanding after the completion of the IPO, and the holders of these sponsor shares are restricted from selling these shares (i.e., their shares are locked up) for a period of one year from the date of the merger. However, if the combined company’s public share price trades over $12.00 (20% higher than the $10 IPO price per share) for more than 20 days in a 30-day period, the lock-up is lifted and the sponsors are free to sell their shares, even before the one-year lock-up period expires.

SPACS, however, have provided for nontraditional treatment of the founder shares that set the de-SPAC transactions apart from the traditional SPAC structure, such as reducing the amount of founder shares purchased at a nominal price from 20% to 10%, or subjecting the founder shares to vesting based on certain stock price milestones, much like stockholder earnouts.

One of the key strategies in which sponsors are aligning their interests with those of the target stockholders is increasing the length of the sponsor’s lock-up period or creating a tiered release of the transfer restrictions. For example, in the notable merger between Social Capital Hedosophia Holdings Corp. V and Social Finance, Inc., the sponsor agreed to a lock-up of 180 days or earlier based on stock price milestones, a longer lock-up period than the 30-day period for target stockholders. In the merger between Reinvent Technology Partners Y and Aurora Innovation, Inc., 25% of the sponsor shares could be transferred after the first anniversary of the closing while the remaining 75% of sponsor shares were separated equally into three tranches subject to price-based vesting after two, three, and four years from the closing date.

Key Provisions in Business Combination Agreements

Lastly, the 2020 trends relating to certain provisions within the business combination agreements continued in 2021. In de-SPAC transactions in 2021:

• Buyers agreed to limited representations and warranties.
• In nearly all transactions, there were no post-closing indemnification obligations of the target company.
• Parties did not obtain representations and warranties insurance, except in the case of a few transactions.
• Most of the transactions included a cap on D&O insurance premiums.
• Very few of the transactions included a termination fee.
• Post-closing purchase price adjustments and earnouts were used less frequently.

Traditionally, de-SPAC transactions have not included a fiduciary termination right in favor of the SPAC, and the transactions usually include force-the-vote provisions and an obligation by the sponsor to vote its shares in favor of the deal. As more SPACs go public and begin seeking targets, resulting in a more competitive market, we may see such fiduciary termination rights evolving.

Notable De-SPAC Transactions

The transactions in these charts link to Market Standards, the searchable database of publicly filed M&A deals from Practical Guidance that enables users to search, compare, and analyze more than 38,000 transactions using up to 150 detailed deal points to filter search results. For more information on Market Standards, click here.

SoFi Technologies, Inc.

Lucid Group, Inc. (d/b/a Lucid Motors)

OfferPad Inc.

Gingko Bioworks, Inc.

Aurora Innovation Inc.

Grab Holdings, Inc.

Buzzfeed, Inc.

Jamie (Cole) Payne is a Content Manager with Lexis Practical Guidance’s Corporate and M&A team. She has several years of legal experience advising clients in mergers and acquisitions, entity formation, corporate governance matters, and commercial contract negotiations. Her experience is not limited to any one particular industry, and she has worked with a variety of privately-held and public companies. Jamie also served as an adjunct law professor for a brief period of time. She is passionate about teaching best practices and negotiation skills, as well as coaching other lawyers in professional development.

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