Let’s Talk About SPACs, Baby!
Listerine was invented 135 years ago, first as a surgical antiseptic, but also as a cure for gonorrhea (please don’t try this at home). An article from 1888 recommends Listerine "for sweaty feet, and soft corns, developing between the toes." Over the course of the next century, it was marketed as a refreshing additive in cigarettes, a cure for the common cold, and as a dandruff treatment. But it was in the 1920s that the powerful, germ-killing liquid finally landed on its most lucrative use as a magical cure for bad breath.
If you close your eyes, you can probably imagine a young progressive gentleman back on August 18, 1925, fresh off a short 12 hour shift at the tobacco factory - he had left his rural farm life for a union factory job 3 years ago - and was headed to the barber, preparing for a fun night out on the town. As you’re aware, women got the chance to vote exactly 5 years year ago and he heard there was a local parade and dance to commemorate the beautiful occasion. Recently, women shortened, or “bobbed,” their hair, flappers danced and wore short fancy dresses, and men shaved off their beards - times were a changing! After his shave, he headed to the town hall, met a pretty flapper who showed him the latest dance craze, and they watched the fireworks show together on a park bench nearby. The night was going so well that he worked up the courage to lean in for a kiss - and that’s when his bad breath made an unfortunate appearance. She recoiled in horror as he silently cursed the skies about his pastrami, whiskey and tobacco decisions earlier that day. But all was not lost, because his new female companion had some magical Listerine in a small medicine bottle. They love telling this story to their 13 grandchildren - who they agree are way too spoiled because they didn’t live during the Great Depression like they did.
But back to Listerine. As mentioned above, the product did not become commercially successful until it “re-branded” as a cure for bad breath. According to the Listerine story, the company's revenues rose from $115,000 to more than $8 million in the seven years after the change of strategy!
Play-Doh was originally a wallpaper cleaner.
Yes, that strange, brightly colored, salty clay that all of us grew up molding and poking (and, occasionally, eating), was first invented in the 1930s by a soap manufacturer named Cleo McVickers, who thought he’d hit upon a fantastic wallpaper cleaner. It wasn’t for another 20 years that McVicker’s son, Joseph, “re-purposed” the goop as clay for pre-schoolers and called it Play-Doh, a product that remains wildly popular among the under-5 crowd today.
Play-Doh has sold more than 3 billion cans since its debut as a child’s toy in 1956 - that’s more than 700 million pounds of the salty stuff - and was inducted into the National Toy Hall of Fame in 1998.
Frisbees were originally pie containers. I think you get the idea. These successful product “re-branding” and “re-purposing” stories go on and on. And that’s exactly where SPACs come into focus. Let’s talk about them in more detail.
The SPAC Attack
This year, the hottest and coolest trend on Wall Street could be summed up in one strange and unfamiliar word: SPAC.
Celebrity athletes such as Shaquille O'Neal, Serena Williams and Alex Rodriguez have a SPAC. Former House Speaker Paul Ryan's got a SPAC. Former astronaut Scott Kelly launched a SPAC. And a 25-year-old became the youngest self-made billionaire thanks to - you guessed it - a SPAC.
So what is a SPAC? A "special purpose acquisition company" is a way for a company to go public without all the paperwork of a traditional IPO, or initial public offering. In an IPO, a company announces it wants to go public, then discloses a lot of details about its business operations. After that, investors put money into the company in exchange for shares.
A SPAC flips that process around on its head. Investors pool their money together first, with no idea what company they're investing in. The SPAC goes public as a shell company. The required disclosures are easier than those for a regular IPO, because a pile of money doesn't have any business operations to describe.
For the last two decades, SPACs have existed on the fringes of the financial world. "They have this sort of shady origin story," says Usha Rodrigues, a professor at the University of Georgia School of Law. Today's SPACs are descended from the "blank-check corporations" of the 1980s, which "really had a bad reputation," Rodrigues says.
They were so infamous for scamming investors that a federal law was passed to crack down on them. They needed to “re-brand” and they did.
Along the way, this blank-check model was “re-purposed” as a SPAC, with crucial safeguards for investors and other features (discussed below) that have made them attractive. For instance, if an investor didn't approve of the company a SPAC sponsor chose to merge with, the investor could get his or her money back, plus interest.
But SPACs remained unpopular. Until now.
SPACs in SPACE: By the Numbers
Wall Street can’t get enough SPAC deals. In 2020, a record of 248 companies went public through SPAC mergers, a five-fold increase from 2019, according to SPAC Data. That number is about to be shattered. In the first two months of 2021 alone, 203 SPAC deals—valued at $300 million on average—have been announced. If you’re keeping score, that’s potentially $60,900,000,000 USD!
And a lot of that SPAC money appears to be headed to outer space.
Since late 2019, space and satellite-based companies and other companies in the aerospace and defense sector have become a focus of interest from these SPACs. Similarly, SPACs have been looked at by many startup space and satellite-based companies as attractive vehicles for access to the public equity markets after their original venture capital rounds of funding. So there’s an understandable mutual interest between SPACs and private space companies. (Also, as I write this article the computer keeps auto-correcting “SPAC” to “space,” so there must be a connection on some deeper level.)
We saw the first recent space SPAC transaction in October 2019, when Virgin Galactic ($SPCE) merged with Social Capital Hedosophia, a SPAC created by venture firm Social Capital. One year later, in-space transportation company Momentus Space announced its merger with Stable Road Acquisition Corp ($SRAC), a SPAC created by venture fund Stable Road Capital. And in December 2020, it was announced that the New Providence SPAC ($NPA) will effectively take satellite broadband specialist AST & Science public through a SPAC process.
And this trend has not slowed down in 2021. At All.
In February, Seattle-based satellite imagery company BlackSky announced a merger with Osprey Technology. BlackSky is valued at $1.5 billion. The deal is expected to close in July. The combined company will list on the New York Stock Exchange under the ticker “BKSY.”
Earlier in February, Astra Space, a San Francisco-based startup making small satellite-delivering rockets, announced that it’s merging with Holicity to go public in a deal valuing the company at $2.1 billion.
Rocket Lab announced on March 1 that it has agreed to merge with Vector Acquisition in a deal valuing the space startup at $4.1 billion. The deal is expected to close in the second quarter. The merged company will list on Nasdaq under the ticker “RKLB.”
Small satellite maker Spire Global announced on March 1 that it’s going public this summer through a merger with NavSight. The deal values Spire at $1.6 billion. The combined company will list on the New York Stock Exchange under the ticker “SPIR.”
It remains to be seen how long (and more importantly, how profitable) the current wave of satellite and space interest from SPACs will continue, but it is certainly encountering considerable attention. There is no doubt that some of these SPAC space transactions will be the future preeminent space companies in the world and some will flame out and be worth zero. .
The SPAC Transaction
SPACs are entities formed by financial sponsors and/or individual founders to raise funds from the public through a special version of an initial public offering (IPO). In a SPAC IPO, investors buy units (consisting of shares and warrants to acquire shares) in a shell company with no assets or operating history for the purpose of providing the shell company with funds to be used to acquire a business to be identified in the future. The funds raised by the SPAC are held in a trust account for a specified period of time during which the SPAC searches for a target company. The funds must be returned to investors unless the initial acquisition of a target company occurs.
In a SPAC, the investors and underwriters rely on the experience and network of the SPAC’s founders and sponsors to source and negotiate the acquisition of an attractive and viable company (which will become a public company as a result of the SPAC’s acquisition). The SPAC typically has a stated industry or product focus in which the sponsors or founders are experienced. After the target has been identified and a deal has been negotiated, the investors are given the opportunity to approve or reject the acquisition of the target company and are separately afforded the opportunity to have their SPAC shares (but not warrants) redeemed in lieu of remaining invested in the SPAC after the acquisition. For their efforts, and in exchange for a nominal purchase price (usually US$25,000), the sponsors and founders are issued convertible shares amounting to 20 percent of the SPAC’s issued and outstanding share capital. The sponsors and founders also acquire warrants to purchase shares of the SPAC at a purchase price necessary to cover the underwriting fees and discounts from the IPO (plus an additional amount to cover the SPAC’s operating fees and expenses).
Typically, SPACs have three phases:
The IPO phase, in which the SPAC is incorporated, founders receive their shares and warrants, the registration statement for the IPO is prepared and finalized after receipt of Securities and Exchange Commission (SEC) comments, and the deal is priced and closed. The SPAC now has cash, and the time period to find a target begins.
The search phase, in which the SPAC (through its founders and sponsors) conducts a search for a suitable target business. Once a target business is identified, preliminary negotiations occur to establish general deal terms, the SPAC completes the commercial and legal due diligence phase, and the parties negotiate and execute an acquisition agreement. Typically, the SPAC will also seek to obtain separate private commitments for additional equity and/or debt financing during the search phase (that will be closed concurrently with the acquisition by the SPAC) to ensure that the SPAC has sufficient capital to complete its targeted acquisition. Given that SPAC investors are afforded the right to have their shares redeemed after a target business has been identified, it is often critical to have these additional sources of financing available. During the search phase, the SPAC (as a public company) needs to file regular periodic reports with the SEC.
The de-SPAC stage is the final stage in the process and begins when the acquisition agreement is signed and publicly announced. At this point, the SPAC shareholders vote on the transaction and are also given the right to elect to have their shares in the SPAC redeemed. Materials for these matters (e.g., proxy statement, tender offer document, etc.) are filed and cleared with the SEC. If the shareholders approve the transaction, then the transaction proceeds to closing and the target company is now a public company. After the closing, the SPAC files a current report on Form 8-K disclosing all required Form 10 information about the combined company.
The Benefits
Target companies can certainly undertake their own public offerings to accomplish their “going public” goals without the complexity and dilution that comes with SPAC transactions. Why would investors give their money to sponsors before a target business is identified, taking the risk of some leakage if no suitable business can be found, and then accept the sponsors taking a significant share of the equity in return for having identified and valued the target business?
It is worth noting that the public shareholders are in effect buying the expertise of the founders to identify a suitable company to go public and deploy the funds raised by the SPAC. On the company side, the owners of the target business are taking the company public and raising funds, but they’re doing so by being acquired and going through an acquisition process rather than a public offering process. This presumably benefits the owners from a lower risk of transaction completion, once an acquisition agreement is reached (only needing a shareholder vote), than would be encountered in a public offering process that includes retaining underwriters, filing a registration statement, going through an SEC review process, accepting a market (rather than negotiated) valuation, and taking the risks of market movements during the process.
Special issues encountered in SPAC transactions with space-based companies
Space and satellite-based companies do very clearly meet some of the key suitability features for being taken public through a SPAC transaction. Most significantly, they tend to be very capital intensive, and can benefit (and hopefully produce the returns expected) from investment of a large pool of capital over a fairly short time frame. While space companies can be very high risk ventures – one of the major risks is the need to raise large amounts of capital – the SPAC transaction goes a fair way to address that risk. Space companies also are often exciting and have “movie quality” technologies, and as there are currently few such companies publicly traded, space companies offer public investors relatively unusual investment opportunities. However, space companies can also be heavily regulated. While many regulated companies do well once they are public, the process of taking a heavily regulated company public can take some time and potentially not be as smooth as desired. Next, we identify some of the areas that pose risks which potential target companies can address to increase their attractiveness as a SPAC target and improve the probability of successful deal execution.
Government contracts: Evaluate effects of a change in status
Many pre-commercially operational space companies, often the ones who would benefit most from the large pool of SPAC capital, have a series of government contracts for the development of various technologies. Some of these commercially advantageous government contracting programs do not adapt readily to the company going public on short notice. There may be governance issues, where the company has structured itself to protect classified (or nonclassified, but sensitive) technologies, that have to be re-examined and re-vetted with government agencies before the company can go public. Some of the technology contracts and grants are made under small business qualification programs, and while those programs may tolerate significant growth following the award, they may not fit as well when a company is acquired and becomes publicly traded. Since the SPAC likely does not want to spend months sorting through these issues and may not have the expertise to appreciate their complexities, the target company may want to take upon itself (before being approached by its SPAC suitor) an evaluation of the issues under its government contracts and grants, and develop a strategy to handle these issues relatively quickly once it seems like a SPAC deal might happen.
Export controls and other regulations: Upgrading programs and managing voluntary disclosures
Satellite and other space industry companies are heavily regulated under U.S. export control laws, including registration and licensing requirements. Acquisitions of space industry companies regularly trigger pre-closing notifications and/or post-closing filing requirements. In addition, the global reach of satellite services and global supply chains, and the frequent presence of non-U.S. investors in U.S. space companies often generate significant compliance risks, Committee on Foreign Investment in the United States (CFIUS) concerns, and even issues under economic sanctions regulations.
Transaction-related due diligence often reveals areas where export compliance programs need to be upgraded, or even instances of non-compliance that may trigger the need for “voluntary disclosures” to regulatory agencies. Well-advised acquirers (including SPACs) will want all of this handled prior to closing, particularly because these regulations may be enforced against successors-in-interest on a strict liability basis and because such enforcement actions may result in significant reputational risks and disruptions to the business. In the case of a public company, it may be required or advisable to disclose the compliance-related risks and any pending voluntary disclosures or enforcement actions in the SEC public filings as well. Although most voluntary disclosures ultimately are resolved with no penalty, the agencies may take months or even years to respond. If the agencies decide to impose penalties or other enforcement actions, it may take some time to work through the settlement agreement process. Plus, if these issues are emerging for the first time just before the SPAC transaction, the risk will seem more substantial than if a voluntary disclosure was made months or years before and no enforcement action has been taken. In many cases, the only way to establish that enforcement action is unlikely is to have a significant period of time elapse without any further agency action or for the parties to engage with the agencies proactively to seek closure (which may increase the risk of enforcement action). In any case, the timing for resolution of such regulatory compliance and enforcement matters may not be consistent with the timetable for the SPAC transaction, forcing the parties to consider escrow arrangements, valuation adjustments, or other measures to address the pending enforcement risk.
To head off potential issues in this area, the target company may want to undertake an internal review prior to engaging with the SPAC suitor. That review likely will lead to an upgrade of the company’s compliance program. It is frequently the case that as companies grow, they outgrow their compliance programs. Without a natural reason to revisit the compliance program on a regular basis, it is quite easy to reach a situation where the compliance program is no longer adequate to cover the company’s business risks. If a company is only revisiting its compliance program in the context of a transaction every two or three years (or longer), the company should expect to identify potential compliance issues. If more serious issues are discovered, and a voluntary disclosure is advisable, it will be important to consider the appropriate course and allow time for resolution of the matter.
Communications licenses
Often, space and satellite companies require or hold licenses from one or more regulatory bodies such as the Federal Communications Commission (FCC), the Federal Aviation Administration (FAA), or the National Oceanic and Atmospheric Administration (NOAA). In some cases, regulatory approvals may be required prior to the SPAC transaction. Agency actions are typically public and subject to notice and comment, and such processes may take months to complete. In addition, these processes are subject to scrutiny by the Department of Justice, Department of Defense, and other national security agencies. For that reason, it may be important to prepare in advance for the regulatory process so that it can be completed during the third phase of the SPAC transaction, when the acquisition agreement has been announced and the process for obtaining shareholder approval is underway. There may be limited actions that can be taken that actually reduce the time needed for the standard regulatory approval, but heading off other matters that may extend the regulatory approval process could be quite important. A company may therefore want to make sure it is in full regulatory compliance prior to going into a SPAC transaction, and that all potential issues that could result in delays by the agency have been flagged for the agency well in advance and worked through, to the extent possible.
Public disclosure/SEC filings
Most private companies do not give much thought to what their SEC disclosures would look like, and how they would manage “ugly” disclosures. Private companies often encounter significant regulatory risks, delays, and hurdles that are treated as ordinary business occurrences, without a thought as to whether the matter would have to be disclosed and what the company’s response would look like in print. By contrast, public companies spend a substantial amount of time worrying about making disclosures and how those disclosures would be assessed by investors. Therefore, a disclosure review, with the assistance of lawyers or financial advisers, should be placed squarely on the list of good practices to be undertaken prior to the SPAC process. Issues will inevitably be identified, and the company will have time to take actions that can put the required disclosures in the best light. Some of the issues may be financial, and the process of working through disclosures with auditors can use up a lot of time. The company will also need practice in becoming a public company. The normal IPO process barely leaves enough time to put in the relevant plans and processes and getting ready to be a public company can be even more challenging in the context of a SPAC transaction. Preparation time is quite helpful and should be created and used well.
Closing Thoughts
Overnight, or so it seems, space has become “red-hot,” facilitating new financing and exit options for space entrepreneurs and investors. Space, the final frontier, is at last open for business. Compared to the 1990s space boom, the current industry growth and investment cycle appears to have more sustainable and enduring foundations. In addition to lower launch costs, space companies have discovered Moore’s Law and adopted R & D approaches from the tech world, including rapid innovation, iterative hardware design, and a focus on disruptive cost reductions. These innovations, along with greater access to capital, provide new entrants with a pathway for disrupting the established order.
From 2010 through 2020, a full-fledged space technology revolution took hold as venture capital poured into the space sector, drawn by opportunities for disruptive business models and prospects for sizable economic returns. Annual equity investment in early-and growth-stage space opportunities grew explosively from less than $100 million in 2010 to well over $5 billion by 2020.
However, a dark cloud was forming over the industry — the absence of successful exits.
Space entrepreneurs now have many financing exit options at their disposal if they launch an attractive space company - private equity platform, M&A with a blue chip defense or technology company, traditional IPO, and of course, via the hottest exit trend - the SPAC.
Now, will all of these space-focused SPACs succeed, or even survive, long-term? Unlikely. Will there be a bubble after all this SPAC merger activity? Likely. And since all good things come to an end, what and who will drive the next phase of the space industry growth?
Lots of good questions and potential paths forward, but for now, let’s keep things simple and remember the following:
You can’t spell SPACE without SPAC.
(and use Listerine before a big date)