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Has the SPAC Spigot Finally Run Dry?

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What You Need to Know

  • The days of 20 or 30 new SPACs each week may be behind us. And that isn’t necessarily a bad thing, experts say.
  • Recently, the SEC decided to qualify warrants on the SPACs as a liability rather than equity on financial statements.
  • Still, SPACs have become a viable alternative to IPOs and direct listings, the other ways companies can go public.

The SPAC market has gone from a high-powered firehose to the slow dribble of a leaky sink in just one month. In April there have been 11 SPACS announced—in March there were 115.

There is no one singular reason, but attorneys who work in and around the mergers and acquisitions and capital markets world say it’s a combination of increased SEC scrutiny (and a qualification change of how warrants are classified on financial statements), market saturation and the general theory that this couldn’t go on forever.

The rise and fall of the SPAC has been rapid.

According to financial data company Refinitiv, there were more than 10 SPACs announced in a month four times between January 2019 and June 2020, with an average of just under eight SPACs per month during that 18-month span.

Between July 2020 and the end of March 2021, there were no fewer than 18 per month, and the average over that period was 58 per month. 

‘A Virtual Halt’

The beginning of the new year saw an explosion in SPACs. The pace ramped up to an average of a little over 40 per month in the last few months of 2020. In 2021, the average in the first fiscal quarter was 103 SPACs per month.

Then, less than a dozen in April.

“The SPAC IPO market has ground to a virtual halt,” Tom Burton, member at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo and chair of the firm’s energy and sustainability practice, said.

He pointed to several factors that facilitated this, related to both business and accounting, including private investment in public equity (or PIPE).

“The PIPE market has been used to validate the valuation that SPACs subscribe to their targets,” Burton said. “With the market pricing now, it has caused the PIPE market to pause and the PIPE investors to reevaluate the value of these transactions.”

From a market perspective, “we would expect to see a normalization as valuations will come down and then we will start again,” he added.

SEC Impact

Burton noted another cause for pause: the recent SEC decision to qualify warrants on the SPACs as a liability rather than equity on financial statements. 

“The SEC hasn’t really given official guidance on this, and that is a case where the accounting firms will need to work with the SEC. That has caused a slowdown,” he said. 

Christopher Anthony, partner in the M&A and private equity group at Debevoise & Plimpton, agreed. 

“That has been a big part of shutting off the pipeline,” he said. “There are basically two accounting firms that do all of the SPAC accounting.”

That’s not an exaggeration. 

For all the law firms, SPACs and targets out there, there are only two accounting firms, Marcum Accountants & Advisors and Withum, that do most of the SPAC work on the accounting end. 

“The accounting for blank check companies isn’t particularly difficult,” said David Goldschmidt, global head of the capital markets group for Skadden, Arps, Slate, Meagher & Flom.

“But these relatively small accounting firms are doing some insane percentage of all the SPACs. Because of potential conflict, the Big Four have avoided the auditing the SPACs because the targets are often clients. Law firms were somewhat overwhelmed by the number of SPACs earlier in the year, and the accounting firms were even more so,” Goldschmidt explained.

Anthony also said the conditions for PIPE financing, a load-bearing member in the house of SPAC, have made it a bit more difficult lately to find said investment. 

“People have different theories on this, but big, institutional investors were so gangbusters that they used what they were going to spend for the whole year,” Anthony said. “That makes it take longer to get PIPE funding if you get it at all.”

Between the SEC seemingly looking for a way to slow things down and high valuations tempering an active buyer market, the predictable course is a slowdown in activity. And that may not be a bad thing. 

What’s Next?

Even if the flow of new SPACs does swing back to pre-2020 levels, there is still a lot of work to be done for those involved, and the change in activity likely won’t affect how firms staff in the coming months. 

“We haven’t really experienced a slowdown ourselves,” Ken Lefkowitz, deputy chair and executive committee partner at Hughes Hubbard & Reed, said.

“A SPAC is two things: and IPO, which law firms do a lot of, and a de-SPAC, which is basically M&A work, which law firms do a lot of. That is 90% of it. I don’t really see firms changing their makeup, but rather just a change in function for the capital markets and M&A groups,” Lefkowitz explained.

All the attorneys interviewed for this piece agreed that SPACs aren’t going to disappear, and have become a viable alternative to IPOs and direct listings, the other ways companies can go public.

But, while the fervor of the first quarter of 2021 may be done, none expect the SPAC to go away, and the moderation of the number of SPACs may even be good for the market. 

“The slowdown gives some less successful companies a chance to hit some milestones to go public when they are more mature,” Anthony, of Debevoise, said. “And that is a good thing for the market overall.”

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