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Shaq, A-Rod, Steph Curry, Serena Williams. This is not a list of the greatest athletes of all time, but rather a group of celebrities that has jumped on the wave of companies seeking an alternative form of entering the public markets: SPACs.
The recent involvement of these athletes, and notable leaders in the industry like former Gap CEO Art Peck, with SPACs — or special purpose acquisition companies — comes as this vehicle for going public sees a spike in popularity. Within the DTC space, BarkBox parent Bark last December announced it would go public in a $1.6 billion SPAC deal. And just months before, telehealth company Hims & Hers said it would list publicly on the New York Stock Exchange following a deal of a similar nature.
While SPACs aren't necessarily new, and follow the same general principles as a reverse merger, in the past they were "very minor" and "not very favorably viewed by brands as an option for going public," according to Rebekah Kondrat, founder of Kondrat Retail, a retail consultancy that helps direct-to-consumer brands build stores.
An outlier, American Apparel in 2007 went public via SPAC after being acquired by Endeavor Acquisition Corp. bypassing the traditional initial public offering route.
That year, just 66 special purpose acquisition companies, across industries, went public, according to data from SPACInsider. The avenue really started gaining steam in 2019 and continued to develop in the years since, hitting a fever pitch this past year with 489 SPACs listing publicly as of Oct. 22.
SPAC IPOs, across industries, have skyrocketed in 2021
The dramatic rise "seemed to come out of nowhere, even though SPACs have been around for quite some time," Kondrat said. "It's really this backdoor way to go public."
The rise of SPACs
Up until recently, direct-to-consumer brands generally used two main paths when it came to an exit: being acquired or filing for an initial public offering.
"Either you went out and got money from the public or you went to big brands like Unilever or P&G … and you got them to absorb your brand and expand your infrastructure," Kondrat said.
But as brands witnessed DTC acquisition deals falling apart, notably from razor brands Harry's and Billie, that exit path became less certain. There was this concern that going public through an IPO or staying private were the only viable options for brands going forward, Kondrat said.
However, for brands considering the traditional IPO route, seeing unsuccessful outcomes like that of Casper has made them more skittish toward that option as well, Kondrat said. Following a funding round in 2019, Casper had a valuation of $1.1 billion. Now, the brand is valued at $184 million as of Oct. 20, a more than 80% decrease.
A major factor in deciding to go public through an IPO is the capital a brand can raise from it. But the process of a traditional IPO can become expensive because there are a lot of regulatory costs involved, and brands need to hire third parties to serve as underwriters, which come with fees. On average, underwriting fees can be up to 7% of gross proceeds raised from the initial public offering, compared to SPAC deals, which typically involve underwriting fees of 5.5% (2% fee up front plus another 3.5% fee upon completion of the deal.)
That's helped fuel a surge in popularity for deals involving special purpose acquisition companies.
A SPAC allows professional investors to create a shell company, which lists publicly. This company can then merge or acquire an existing company, allowing that company to go public, a process called de-SPACing. The target company can "skip" the regulatory paperwork of a traditional IPO, allowing "the professionals [to] handle that," according to Michael Watson, senior legal counsel at Deminor.
The shell companies, sometimes referred to as blank check companies, go to investors to raise money and then have a window — typically about two years — to merge with or acquire brands looking to go public. If they don't find a brand, the money goes back to the investors. If they do find a target company, the de-SPACing process can move forward. The shell companies are highly incentivized to find a target, Watson said, because oftentimes they'll get about 20% of the shares being purchased without having to put money in themselves.
"Even if it's a bad deal, it's a good deal for them, because they otherwise would get nothing. They'd rather have an overvalued company than nothing," Watson said. "The sponsors are in a very different position from their investors, who might be better off not making that investment."
Within this process, there's often another stage to raise funds for the company going public called a PIPE offering, or a private investment in public equity.
"There'll be a large institutional investor that will also acquire shares at the same time the SPAC does," Watson said. So brands looking to use this path as an alternative way to list their shares "can't go public without the SPAC, but the bulk of the money often comes from the PIPE, not from the SPAC."
For example, BarkBox and Super Chewer parent company Bark last December announced it would merge with Northern Star Acquisition Corp. to go public. The companies said once the deal was completed, the combined company would have access to $454 million of gross cash proceeds, including $200 million from the PIPE offering.
"I think where investors really see benefit [in SPACs] is that when you IPO, it's not what you have to disclose, it's what you can't disclose."
Senior legal counsel at Deminor
Aside from accessing capital and becoming a publicly traded company, SPAC deals are attractive to brands looking to go public for a number of reasons, including the fact that it's often faster than a traditional IPO, experts said. The diligence process can be sped up by as much as two to four months compared to an IPO.
"You might start the IPO process in a market that you think is very favorable for raising money, but by the time you're actually ready to do it, the market may have changed," Watson said.
Brands also gain access to expertise that may not be available through a traditional IPO. A lot of SPACs have a specialized focus whether it's industry-led, domain-led or sector-led, according to Hemant Kalbag, a managing director at Alvarez & Marsal. "With the right partnerships in a SPAC environment, I can imagine companies having a shot at catalytic growth."
The SPAC process also offers protections regarding forward-looking statements that allow brands to "hide your skeletons a little bit better" than an IPO, Kondrat said. What companies believe right now, Watson said, is that because a brand is merging into or being acquired by an existing company that already went public — and not pursuing an IPO — safe harbor protections for forward-looking statements apply to it. Those protections cover companies in the case that they release guidance into future financial performance that turns out to be wrong, so long as the statements are accompanied by cautionary language. Companies pursuing IPOs on the other hand, are explicitly not protected under this safe harbor, which is why those companies try to win over investors based on past performance metrics and not future guidance.
"I think where investors really see benefit [in SPACs] is that when you IPO, it's not what you have to disclose, it's what you can't disclose," Watson said. "If you make a forward-looking projection in an IPO and it turns out to be way off, you're going to be in a very weak position when the investors come to lay it against you for making false statements."
This is also why a de-SPAC is particularly attractive to companies that may not be profitable or making enough revenue to go public through a traditional IPO, experts said.
"You're circumventing a shield, but that shield was there for a reason."
Senior legal counsel at Deminor
"I do think you're seeing companies that don't have good revenues that are saying, ‘OK, I don't have revenues, but I can promise them in the future' and I couldn't do that in an IPO," Watson said.
Ahead of Bark's public debut in June, it released preliminary fiscal 2021 results, while providing outlook for the year ahead. While the company projected its net loss to grow from $31.4 million in fiscal 2021 to $41 million in 2022, it also said its revenues would grow from $378.6 million to $516 million — a 36.3% increase.
"They have an ability to market their future performance," said Matthew Katz, a managing partner at SSA & Company. This gives companies the ability to market on potential, which could lead to heightened profits or price targets when they go public. "You can go public through SPAC, but then the real work starts," Katz warned. "Managing the business to the expectation of your new stakeholders is very important."
Companies going public by way of SPAC need to exercise the same level of diligence and expect to make the same numbers public in regards to past financial performance as a company going public via IPO, Watson said. But, he still believes some companies are overestimating their future revenue projections just to get investors on board.
Watson said that with SPACs, "there's this kind of work around … You're circumventing a shield, but that shield was there for a reason."
This ultimately may lead to lawsuits down the line if it turns out that some of those companies were making estimates in bad faith. "If you have this type of transaction — yeah, it's a nice little shortcut, but I do think there's a high chance you'll end up being litigated against," Watson said.
Additionally, whether SPACs have reduced liability exposure and are protected under the safe harbor remains unclear and has raised concerns from the Securities and Exchange Commission. John Coates, acting director for the division of corporation finance at the SEC, in April said that "a de-SPAC transaction gives no one a free pass for material misstatements or omissions."
And SEC chair Gary Gensler last month pushed agency staff to recommend stricter disclosure rules for SPACs, saying that "SPAC sponsors generate significant dilution and costs for investors."
The future of SPACs
Following harsher scrutiny by regulators and investors, the number of IPOs involving SPACs has started to slow.
In the second quarter of this year, there were just 39 SPAC IPOs compared to 292 in the first quarter, when SPAC deals represented 70.7% of all IPOs by volume, according to FactSet.
And while the formation of shell companies is expected to remain at reduced levels, it doesn't mean an end to companies using the vehicle to go public, according to Watson. Because so many SPACs formed in the past year, he anticipates brands will still use these already-created businesses as a way to enter the public markets, at least in the near term. Of the 489 SPACs that went public this year, 402 are still seeking a target as of Oct. 22, according to SPACInsider.
"There are still SPACs out there with pots of money that need to buy up companies that need to de-SPAC," he said. "Those pots of money were created before the SEC started kicking up noise."
While SPAC deals have started to recover from lows in the second quarter, it's unlikely they will reach the same volume they did earlier this year any time soon. "I do think the level of growth that you saw from 2019 to 2020 and then in early 2021 — that was unsustainable," Watson said. "You can't see more and more SPACs [form] at that pace forever."
Instead, Watson believes SPACs may revert back to being less common and more of a "one off" for brands looking to go public in the future. "I don't know that they'll disappear, but they might stop being what they are right now, which certainly has the feeling of a gold rush."
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