The vehicle that an increasing number of companies are using to go public, called a special purpose acquisition company (SPAC), is billed on Wall Street as a streamlined way to list and attract investors. It's a chief reason the number of IPOs surged to 480 last year from 233 in 2019, according to Securities and Exchange Commission (SEC) data.
But now that Ozan Pamir, CFO of biotechnology company 180 Life Sciences, has been through the process, he has some words of caution to anyone considering taking the same approach.
It's not as easy as it looks.
"The costs can get out of hand quickly," said Pamir, whose company was acquired by a SPAC in October after an almost year-long process.
Among those costs: legal, accounting and audit bills that mount, for both the buyer and the bought.
"At the end of the day, both the target and the SPAC are choosing each other, and this can be a very tricky process," Pamir said in an email. "Both sides need to vet each other thoroughly."
A SPAC is a publicly traded blank-check company created to merge with a private company. After the merger, the new entity is publicly traded. It's considered a fast-track route to going public because the acquired company doesn't have to bear the expense, time and effort of a traditional IPO.
In effect, the SPAC is a fundraising machine. The capital it attracts is deposited in a trust fund, and the management team uses the money to finance acquisitions over a period of 18 to 24 months. To be approved as a SPAC, its managers are expected to have experience acquiring or operating companies in the targeted industry.
In the case of 180 Life Sciences, the SPAC — KBL Merger Corp. IV — was well positioned as an acquirer. Its chief, Marlene Krauss, an ophthalmic surgeon with both an MD and an MBA from Harvard, is CEO of KBL Healthcare Ventures, a company she founded 25 years ago. KBL was her fourth healthcare SPAC, for which she raised $115 million. Her total raise through all four SPACs is more than $1 billion.
Krauss also led the acquisition of Concord Health (subsequently sold to another company) and Summer Infant.
"The SPAC we merged with had a management team which was very experienced in healthcare," Pamir said. "This was very attractive to us at the time; if a management team with an experienced acquirer chooses your firm as a target, they have the savvy to know your business would be a good fit."
Under the typical SPAC structure, investors who buy into the company can redeem their investment at any point. Once they redeem, they give up their common shares; they retain other instruments that might have been given at the IPO, such as warrants and rights.
In the deal, KBL Merger Corp IV issued 17,500,000 shares of common stock to the stockholders of 180 Life Sciences: 1,049,999 shares were deposited in an escrow account and subject to forfeiture for indemnification claims, while 1,981,496 shares were structured as issuable to the holders of the existing exchangeable shares of CannBioRex Purchaseco ULC and Katexco Purchaseco ULC, Canadian subsidiaries of the target.
"It's a merger of two entities," he said. You need "to spend a significant amount of time to get familiar with [their] financials... You can start a deal with a SPAC with them having hundreds of millions of dollars, [but] by the end of the process, you may end up with much less."
One reason for that: the deal includes rights and other instruments that can hurt the stock price at closing. "These instruments used to be more commonplace in the past but definitely still something to keep an eye on," he said.
It was a complex and demanding exercise for Pamir to juggle his regular duties while interacting with shareholders and playing a key role in the preparation of the merger’s registration statement, the Form S-4, and its amendment, the Form S-4A.
"One of the most important pieces of the Form S4 is the financial statements of the target entity," he said. "As CFO of the target company, you are in charge of timely and accurate preparation of your company’s financial statements."
He also played a role in investor interactions. "As a private company becoming public, you end up dealing with a lot of the shareholders, who are trying to receive their public company shares," he said.
"The CFO's role in the SPAC process is very crucial," he said.
As with any transaction, keeping costs down is a big factor, and Pamir indicated it was a harder goal to reach than he expected.
"You end up paying legal fees, accounting and audit fees on both sides of the deal," he said.
That's something CFOs need to keep in mind as the lure of attracting a SPAC increases in the years ahead, as it's expected to do. That's especially the case if your company isn't as strong as it could be, perhaps because of the pandemic.
"In the past, SPACs were the ones who evaluated the targets thoroughly, since SPACs don't really have any operations," he said. "With the SPAC craze of 2020, I expect the quality of targets is going to get lower and lower in a short period of time."
Because SPACs only have a two-year span in which to deploy their capital, there could be a lot of impatient money hunting for targets. For CFOs, the goal is to not let the rush lead to short cuts.
"This is going to reverse the roles," he said, "where the companies looking to go public via SPAC are going to be able to shop around to get the best deal. It's no longer the same landscape it used to be."