Volatile Market for SPACs and PIPEs, Competition for Targets Drives Agreement Innovations | Skadden, Arps, Slate, Meagher & Flom LLP

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  • While the SPAC IPO and PIPE markets have been tough in 2021, the huge capital already raised is expected to drive merger activity in 2022.
  • As more shareholders opt to buy back shares and potential PIPE investors review the terms, dealmakers have been forced to re-evaluate target prices and seek other ways to fund de-SPACs.
  • The SEC has made it clear that it will continue to carefully review SPAC disclosures and accounting practices, and the agency is expected to propose new rules for SPACs this year.

The 2021 SPAC market has been a roller coaster. After a strong 2020, deals accelerated in the first three months of 2021, with 298 SPAC IPOs and 97 de-SPAC deals (mergers of target companies with SPACs) announced in this quarter alone. After that, activity slowed considerably in the second and third quarters of 2021. The fourth quarter of 2021 saw a rebound, although still below the level of the first quarter, with 163 SPAC IPOs and 61 transactions of- PSPCs announced. Nevertheless, compared to 2020, the price of SPAC IPOs and de-SPAC transactions announced in 2021 have more than doubled. SPACs priced a record 613 IPOs, a 147% increase from 248 in 2020, and announced an all-time high of 267 SPAC deletion deals, a 178% increase compared to 2020’s 96. As of December 31, 2021, SPACs collectively held in trust more than $138 billion in IPO proceeds — “dry powder” — and more than 500 were seeking an M&A target.

During the first quarter of 2021, private operating companies seeking to go public through a de-SPAC could expect to receive substantial cash from both the SPAC trust account and a simultaneous private investment in public capital (PIPE). In some cases, the amount raised in the PIPE exceeded the proceeds from the IPO. That began to change in the second quarter as more investors opted to redeem their shares before the de-SPAC was completed and the PIPE market tightened. In the fourth quarter, on average, SPACs returned more than 60% of the amount they held in trust, compared to 53% in the third quarter, 22% in the second quarter and only 10% in the first quarter. The average PIPE was smaller relative to the amount raised in the IPO compared to early last year. Additionally, there were more terminations of de-SPAC agreements in 2021 than in previous years, although the 2021 termination rate did not increase significantly from 2020 or 2019 given the higher large number of agreements announced in 2021.

Despite this widely reported slowdown in the SPAC market and the heightened regulatory scrutiny discussed below, we are cautiously optimistic that de-SPAC activity will remain strong in 2022, given the significant number of SPACs seeking of targets and staggering amounts of dry powder. We also anticipate increased innovation in operations in light of market pressures.

Reinforced regulatory control

Since the United States Securities and Exchange Commission (SEC) issued disclosure guidelines for SPAC IPOs and de-SPACs in December 2020, the agency continued to focus on SPAC filings and transactions.

In one Statement of April 8, 2021, Acting Director of the Corporate Finance Division John Coates discussed potential liability risks for SPACs and whether the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (PSLRA) applies to target projections in de-SPAC. transaction disclosures. Although his remarks do not have the force of law, they reflect the SEC’s concerns about the use of projections in de-SPAC transactions.

The SEC has also targeted SPAC accounting practices. The Corporate Finance Division and the Office of the Chief Accountant of the SEC jointly issued a statement on April 12, 2021, outlining the staff’s view that terms common to many SPAC warrants may require the instruments to be classified as liabilities on the balance sheet. Most SPACs had treated them as equity, so the statement forced many people to reevaluate their accounting. Ultimately, most SPACs restated their financial statements and related information.

The accounting treatment of public shares subject to buyback has also caught the attention of the SEC. Through comment letters and in discussions with the auditors, the agency required that these be classified as temporary equity. Again, this differed from conventional practices, under which part of the public shares was accounted for as permanent capital. Consequently, most SPACs have restated their financial statements and related information.

the SEC Regulatory Program asks the commission to propose amended rules governing SPACs in April 2022. Practitioners will follow closely. (See “SEC expected to introduce host of new rules in 2022 and improve enforcement. »

In addition, the Financial Industry Regulatory Authority (FINRA) has set its sights on SPACs. In October 2021, FINRA launched a scan of exams covering the SPAC offers of member companies and the services provided to entities and their affiliates.

PIPE Market Challenges

As noted above, potential PIPE investors took a closer look at -SPAC valuations. This has led, in some cases, to a reduction in the purchase price of the target.

As PIPE capital has been harder to come by and shareholder redemption rates have increased, SPACs have looked for other ways to show market support and/or raise additional funds. Some use their own buyers for all or a significant portion of the PIPE. This may include a “pre-PIPE” process in which the SPAC essentially tests the PIPE market with some investors before initiating the formal process, and/or an “upsize PIPE” process in which the PIPE is expanded with existing investors after the de- The SPAC transaction is announced.

Another alternative is the support of a strategic investor who is not a traditional PIPE investor, via a cash contribution or a commercial agreement.

To further entice potential investors, in some cases, PIPE transactions have included convertible debt, convertible preferred stock, or warrants in addition to or instead of common stock.

Any such incentive should be carefully analyzed, not only from a commercial and contractual point of view, but also for its impact on the market’s opinion of the target valuation.

As long as the PIPE fund market remains competitive, we expect creative incentives and structures to continue.


The SPACs also caught the attention of the plaintiffs’ law firms. Prior to the closing of many de-SPAC transactions, some shareholder-plaintiffs raise objections like those commonly seen in conventional public company mergers. Plaintiffs can, for example, assert claims based on disclosure under Section 14(a) of the Securities Exchange Act, or claims for breach of fiduciary duty under state law. and request additional disclosures. There has also been an increasing number of federal securities lawsuits under Section 10(b) or 11 of the Securities Exchange Act after SPAC shutdowns where the resulting company’s stock price has fall. Framed as class action lawsuits, these cases underscore the need for SPACs to conduct and document robust due diligence on any target. Additionally, see our January 6, 2022 memo on recent developments in Delaware, “Court of Chancery issues first impression ruling related to SPAC.”

The search for targets

As the rise of SPACs and total dry powder has increased competition for targets, creative deal structures have emerged. For example, some SPACs have considered combining two private companies to create a public company-ready business, or partnering with other SPAC sponsors to complete a single transaction between a target and multiple SPACs.

Many SPACs are now turning to targets outside of the United States, especially in Asia and Europe. (See “SPACs considering German targets face unique challenges.”)

We also expect SPACs to seek to merge with divisions of public companies. For the parent company, this can be an attractive alternative to a traditional sale, IPO, spin-off or demerger.

Given the number of SPACs in the market and their competition for targets, we expect to see more transactional innovation.

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