What is a Special Purpose Acquisition Company, or SPAC?
Robert Fenwick-Smith
Founder and Senior Manager at Aravaipa Ventures Boulder, Colorado
SPACs are one of the hottest trends on Wall Street right now. What is a special purpose acquisition company?
Special Purpose Acquisition Companies, commonly referred to as SPACs, currently reign as one of the most talked-about funding strategies on Wall Street. Despite the buzz, there is also an element of mysticism surrounding SPACs. Many business leaders are curious about the potential of SPACs, but aren’t fully knowledgeable about the pros, cons, risks and benefits.
To learn more, International Business Circle (IBC) and Colorado Cleantech Industries Association (CCIA) members came together last week to hear from Robert Fenwick-Smith who aided in the successful completion of a SPAC merger to fund Lightning eMotors. Fenwick-Smith is the founder and managing partner of Aravaipa Ventures, a Boulder, CO-based venture capital firm that invests in Colorado cleantech companies. Here is a summary of Fenwick-Smith’s insights from the recent IBC Zoom call.
What is a SPAC?
For starters, what is a special purpose acquisition company? A SPAC is a company formed by a group of investors or other financial sponsors, whose sole purpose is to raise capital funding through an initial public offering (IPO) with the anticipation of eventually acquiring an existing company. At the time of their IPO, SPACs do not have an explicitly stated merger target, and investors do not know what their investment will fund. The SPAC investment template was created in 1993 by David Nussbaum but has seen a significant increase in popularity since 2014. In 2020, 248 SPACs raised $83.3bn through IPOs.
SPACs vs. Traditional Capital Fundraising
According to Fenwick-Smith, SPACs are useful for companies that are unable to either raise enough private funds or go the IPO route, perhaps due to the maturity of the company or some other factor. “And, by the way,” Fenwick-Smith said, “fund raising, in my opinion, is the only reason any small, private company should ever consider a SPAC merger.”
In the past, SPACs were not able to raise comparable amounts of capital to traditional IPOs. However, Fenwick-Smith says this has changed significantly in the last 18 months. “With the help of lawyers and the investment bankers, it's become a much more codified, pre-trodden path with an ability to raise a lot more money, than in previous days when SPACs were raising much smaller amounts,” he said.
The SPAC Merger Process
For companies seeking to merge with a SPAC, there is a long, multi-step process that they must go through. Fenwick-Smith explains that this process typically is restricted to two years, since most SPACs must complete a merger within that amount of time, and that the progression along that timeline dictates a SPAC’s attractiveness to business seeking their funding. “You don't want to talk to a SPAC too early because then if they see a nicer target walk down the road, they may just drop you,” Fenwick-Smith said. “On the other hand, you don't want to do it too late, because then you start having [risk] problems if you need more time, you need to file for extensions and so forth.”
Be Confident in Your Knowledge of SPACs
Lore may have led you to believe that SPACs relate to insider-knowledge, exclusive to some mystical group of financiers. In truth, SPACs are not mysterious. Though there is a certain level of risk that should be considered, learning from someone with first-hand experience like — Robert Fenwick-Smith —should fully equip you to understand the intricacies of the SPAC space.