SPACs – Trends and Structure after Tontine

In the summer of 2020, Tontine, the largest ever special purpose acquisition company (SPAC), debuted on the NY Stock Exchange. Raising over $4 billion, Tontine is unique not only for its blockbuster offering but also for its structure, particularly of warrants and sponsor shares. In this video, created in partnership with the law firm Freshfields, we explore the structure and benefits of SPACs and what accounts for their explosive popularity in 2020. What was special about Tontine, and what does it mean for the future of SPACs? Seasoned practitioners Pamela Marcogliese and Sebastian Fain explain.


  Pamela Marcogliese is a partner at Freshfields in the financing and capital markets practice.

  Sebastian Fain is a partner at Freshfields in the corporate and M&A practice.


Additional Resources

SPAC – a Quick Definition

According to the SEC, a SPAC is a form of blank check company, "created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified. SPACs are also often structured to avoid being legally subject to the additional requirements [that funds be held in special escrow accounts]. However, SPACs often incorporate many of the requirements or some derivation of the requirements in order to attract investors."  

Source: SEC on Blank Check Companies

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SPACs – Trends and Structure after Tontine Brief Transcript

Interview with SPAC Experts – Pamela Marcogliese and Sebastian Fain

Joel Cohen (Host): In July of 2020, the world's largest SPAC — Special Purpose Acquisition Company — floated on the New York Stock exchange. At 4 billion raised, it was unique not just in size but also in terms of structure. Today we'll be learning about what's new when it comes to SPACs. Hello, and welcome to TalksOnLaw. I'm Joel Cohen. Today we're joined remotely by Pamela Marcogliese and Sebastian Fain of the global law firm Freshfields. Pam, Sebastian, welcome to TalksOnLaw.

Pamela Marcogliese (PM): Thanks for having us.

Sebastian Fain (Fain): Thanks, Joel. It's really great to be here.

Definition of a SPAC

Host: Before we get into the details of what's new or trending in terms of SPACs, let's get a working definition. I've heard them referred to as a blank check company. Sebastian, what does that mean, and what is a SPAC?

Fain: So a SPAC’s a Special Purpose Acquisition Vehicle. They raise money in the public markets, so they do an IPO, and they do the IPO with the intent of doing a deal in the future. And that's sometimes why they're called blank check companies because you're giving the founders essentially a blank check to go and, you know, do a deal and while the sponsors are out looking, the money stays in trust. And if for some reason they don't get a deal done within the prescribed time (normally that's about 24 months these days), then they actually have to return the money to the investors.

Host: Just a basic question: if there's such a great opportunity to invest in something, why not raise it when they have the target in mind?

Fain: It's a great question, Joel. And so one way to think about SPACs is actually as a democratization of private equity, so in PE — the private equity sponsor — they don't have deals lined up when they go out and raise funds. They're investment professionals with deal experience and maybe some sector expertise, and they convince investors to commit funds that the sponsor will use to fund a deal in the future. So, SPACs generally have the same setup. They've got sponsors, which are veteran deal makers or have industry expertise or sometimes both. We're also seeing a lot of repeat SPAC sponsors with strong records of getting deals done, so these sponsors raise from the public again. It's the democratization of public equity. You don't have to be an institutional investor or a pension fund or a family office. Anyone can go and contribute their ten dollars and get the benefit of these veteran deal makers and hopefully successfully find a deal. And in fact, in some ways it's better than PE for a small investor because, unlike in PE, if you don't like the deal you don't have to continue investing. In all the SPACs that are out on the market today, SPACs agree to redeem any shareholder that doesn't want to move forward with the transaction, and they can get their money back.

Why the recent boom in SPACS?

Host: SPACs —  is this something new, or just something that's become increasingly popular?

PM: So, in fact, SPACs are not new. They've been around for a while. I think that the reason that people are much more focused on them is that they have really increased in prevalence as a result of the dislocation in the markets that we've seen as a result of the pandemic. And so at the very beginning of the pandemic when the capital markets and frankly the IPO markets fell apart, this really started to seem like an appealing way to go public. And so we saw a number of companies go public this way, and then what we saw is a number of SPACs get raised, and then a number of other companies go public this way. And as a result, I think of that catalyst we've just seen as an increasing trend in this area.

What makes a good target for a SPAC?

Host: You mentioned that this is a way for companies to, in a sense, go public. What types of companies make for good targets of SPACs?

PM: Well, I think what we're seeing is that just about any company can be a good target for a SPAC, and the proliferation of SPACs and the increase in the number of areas that they're focused on really proves that out. I think that we've seen SPACs in a number of sectors, and so I don't think there's really a sector that's not appropriate for doing a SPAC.

Host: You mentioned that, you know, there's a number of different sectors, but are there any in particular that have been hot?

PM: Well, we have definitely seen a concentration in the electric vehicle space, so there have been a number of the SPAC transactions in that area. But I think that we've seen a number of SPACs be raised in the tech sector and in the fintech sector. There are a number of SPACs being done in other areas as well, so we have seen a concentration there. And I think that's a really interesting phenomenon, but I don't think that's indicative of anything, or I don't think it means that other areas aren't equally suitable for a SPAC transaction. 

The Structure of the Tontine SPAC

Host: In my intro, I mentioned the size of the recent Tontine SPAC, but the structure of that particular vehicle was also distinct. What was new or different about tontine?

Fain: Tontine was really interesting, and not just because of what it did have (which is Bill Ackman and four billion dollars), but also for what it didn't have (which was the sponsor promote shares). So, we spoke about sponsors a little bit ago — the deal makers who create SPACs. What we didn't mention is that in the standard SPAC, those sponsors are very well remunerated. They get paid well for the risk of setting up a SPAC. So, the way it works is they usually put in a small amount of capital, so twenty five thousand dollars, in exchange for twenty percent of the SPAC’s shares. They'll also invest a few million dollars in exchange for warrants, and those warrants can represent up to 25 or the right to buy 25 percent of the SPAC’s shares. So, in a decent-sized deal, the return on capital can be quite generous, and it's actually something the SEC has said that they're looking into the disclosure around. One of the many things that Tontine has done differently is to completely get rid of the founder shares, so there's no free common equity anymore. And they also struck the warrants a little bit above what they're normally struck at, and more importantly the warrants have a three-year runway before they can be exercised. Normally, warrants are exercisable immediately following closing, so here before Ackman reaps any of the benefits, the company's got to be successful for three years.

Host: Interesting, so it sounds like it's much less of a lucrative deal for the sponsors.

Fain: Sure, so Tontine is, in fact, less lucrative up front, but the goal is to attract a much better target. So, when you think about the options that a private company has, SPAC is just one option, right? I mean, they could continue to be private and raise capital privately, they could go public via an IPO, they could try to get acquired by a strategic or private equity. And they all come with their own costs and benefits, but the cost of capital is a factor that any counterpart is going to take into account. So, if you have many SPACs competing for the same companies as you do right now, and on top of that the companies have other options such as private equity, you would expect that a SPAC with a lower cost of capital on Tontine, which did that by eliminating the founders warrants, is going to be more attractive. Tontine, for example, in its IPO perspective said it was seeking a mature unicorn, so if it comes away with a deal for a really great company, then there'll still be significant upside even without the founders shares. 

SPACs – Trends after Tontine 

Host: Given this new structure, how is it impacting the future of other SPACs or the market in general for this type of vehicle?

PM: So, I think that what you're seeing that maybe started with the Tontine SPAC is really a maturation of those terms. And because those terms are getting to be a little bit more favorable to target, as Sebastian mentioned, there is an opening up of the types of and quality of targets that may be considering a SPAC transaction. But not all SPAC are created equal. There's still a really wide variety, but that sort of makes it such that there's really something to consider here. So, the SPAC targets can really look around at the SPACs and see if there are economic terms that they'd be willing to consider. And so just recently you have seen a number of very large, very high profiles SPAC transactions, and you think that really is as a result of sort of the more sophisticated nature of the SPACs, the more high profile nature of some of the sponsors that frankly it would have been unthinkable ten years ago for those kinds of companies to go public via SPAC transaction.

Host: Talking about the future, what do you see for the future of SPACs? You mentioned in your description that this new upward trend in terms of numbers was partly a response to some sluggishness in the capital markets as direct listings pick up. What do you see that meaning for the future of SPACs? Is this a spec bubble, or are they sticking around? 

PM: Comparing direct listings and SPACs is actually a really interesting question. In a SPAC, the pricing is largely arrived at bilaterally with the SPAC itself between this SPAC and the target in a direct listing. As you know, it's really done through the matching of the buy and sell orders as the company lists, and so it does avoid the IPO roadshow. 

Fain: That's a place where SPACs really do have an advantage over an IPO, so in an IPO you hire a bunch of bankers, and you give them a model, and they tell you what they think the valuation is, and then you go on a road show where you try to prove it all out and hopefully the pieces come together and you have a deal. In a SPAC deal, the target negotiates bilaterally with the SPAC to come up with a valuation just like in any other bilateral M&A deal. And sometimes the market disagrees, and the deal has to get renegotiated in order to avoid the redemptions that we spoke about earlier, but you’re going to the market with an announced deal and with valuation and usually with projections that support it. And it allows for more certainty than you get certainly at the start of an IPO process.

PM: But there are downsides to these structures as well, so it really depends on what the company is trying to maximize for, and as part of that I think that again the more favorable economic terms on the SPACs will continue to make those compelling alternatives. And so I think the bottom line here is that there's just a lot of optionality — a lot of really good options — for companies to consider, and depending what it is that they're trying to maximize for, that'll direct them towards the option that suits their ultimate goals the best. 

Host: Pam, Sebastian, thank you so much for your time and for zooming in with us today.

PM: Thanks, Joel.

Fain: Thanks a lot for having us, Joel. It's been really great.

Joel: And thank you for watching TalksOnLaw