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October 4, 2020
Many people are relatively familiar with a company IPO, or initial public offering, whereby a private company offers the public an opportunity to purchase shares of its company stock. Far fewer individuals are familiar with SPACs — special purpose acquisition companies — though they have become more popular in the last few years. A SPAC is a company created specifically to raise capital through an IPO with the goal of acquiring another company. For private companies that are interested in going public, but may not have access to the capital markets required to IPO, being acquired by a SPAC can be appealing.
SPACs are sometimes referred to as “blank check companies” because they raise capital to acquire a company that has not yet been publicly identified. SPAC investors will initially not know where their money will be going, although SPACs are typically formed by investors with expertise in certain areas. SPACs do not have any day-to-day operations so they will often be able to offer shares of their stock for public purchase significantly quicker than a traditional IPO would. Furthermore, SPACs are typically less risky than a traditional IPO for a company because it is a negotiated deal at a set price with one company, the SPAC. Once the SPAC has raised the capital required to acquire a company through an IPO, the owners of the SPAC typically have two years to identify a target and complete the acquisition. If they do not do so within that time frame, the funds will be returned to investors.
Let’s say you work for a company that is being targeted by a SPAC. Your experience will be fairly similar to the experience you would have working for a company that will be going public through a traditional IPO. Once your company is identified as the SPAC’s target, a formal announcement will be made and within approximately two weeks the SPAC will file a merger agreement and necessary forms with the SEC. At this time, the SPAC will also provide an estimate for the exchange ratio — the relative number of new shares that will be given to existing shareholders of the company being acquired. This information is important for anyone who owns shares of the company being acquired, as it will help inform what your ownership will look like post-acquisition.
Shares of the company being acquired will convert to shares of the SPAC on a like-to-like basis (i.e., if you own restricted stock units (RSUs) before the acquisition, you will own RSUs afterward). However, the price per share will likely be different, which is similar to what happens during a stock split. For instance, if you own 50 shares of Company ABC at $20 per share, you could end up with 100 shares of Company XYZ at $10 per share. While the exchange ratio is made public, it can change slightly as the share price of the SPAC may change once the acquisition announcement is made. The goal during the acquisition is to keep equity holders in the same economic place they had been prior to the closing of the deal. Given this goal, there is typically not much employees need to do in advance as this often does not present substantial planning opportunity for exercising stock early at a lower valuation.
There are some notable differences between a SPAC IPO and a traditional IPO. Like a traditional IPO, a SPAC IPO often requires an employee lock-up period, a predetermined time frame that prevents company owners, employees, and early investors from selling company shares. However, a SPAC IPO lock-up period is typically much longer than that of a traditional IPO and can range from 180 days to one year. During this time, employees are prohibited from selling shares to avoid drastic changes in share price and volume after the acquisition. An early release from the lock-up period is possible but it usually depends on how well the stock price is performing. The other notable difference between a SPAC IPO and traditional IPO is the idea of an earn-out provision. An earn-out provision can work in different ways, but essentially if the stock price hits a certain level, it provides shareholders with additional company shares. For example, let’s say you own 1,000 shares at signing, and an earn-out provision allows for an extra 10% kicker if the stock price hits $15 per share. At that point in time you would then receive an additional 100 shares. The goal behind the earn-out provision is to protect pre-transaction equity holders from potential underpricing during the IPO.
Given a SPAC IPO is fairly similar to a traditional IPO, employees should think of their equity awards in the same way they would with a traditional IPO. With any equity awards, the first step is to identify how much company stock you want to own. It is typically riskier to have all of your wealth tied up in one company, especially the company you work for. So, an IPO often presents a great opportunity to better diversify your wealth. Once you have identified how much company stock you want to retain, the second step is to develop a plan of action based on the specific type of equity awards you own, such as incentive stock options (ISOs), nonqualified stock options (NQSOs), restricted stock units (RSUs), or even common stock. Depending on the type of equity awards, there can be different tax consequences involved with exercising and/or selling them. That said, taxes should not be the only determining factor of whether you retain or sell company stock. Developing a tax strategy for your various equity awards can help minimize taxes due or even defer them to a lower tax year. Once you have a tax plan in place, the final step is to determine if there are any restrictions based on whether you plan to stay with your company, whether you are considered an insider, or whether you are an executive. Under any of these circumstances, there may be specific restrictions surrounding the ownership of company stock, such as a minimum holding requirement, lock-up period, or other types of trade restrictions.
SPACs continue to gain in popularity as a quicker and often less risky way for a private company to go public. Particularly in 2020, many companies have chosen to go public through SPACs as the IPO market has become increasingly unpredictable due to the coronavirus pandemic. In many ways, there is more certainty for employees working for a company being acquired by a SPAC than a company pursuing a traditional IPO as the price is pre-negotiated upon agreement and therefore more sheltered from regular market volatility. While it may be a big adjustment for employees, in general, equity holders should maintain the value of the shares they hold with the hope of gaining higher upside potential.
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Florida, Illinois, Ohio, Massachusetts, Michigan, New York and Texas. Registration of an Investment Adviser does not imply any level of skill or training. This commentary is limited to general information about Cerity Partners’ services and its financial market outlook, which may not be suitable for everyone. The information contained herein should not be construed as personalized investment, tax, or legal advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this commentary will come to pass. Investing in the financial markets involves risk, including the risk of loss of the principal amount invested; and may not be appropriate for everyone. The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. All information is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2A using the contact information herein. Please read the disclosure statement carefully before you invest or send money.
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