Six years ago, the TSX adopted specific rules governing the listing of Special Purpose Acquisition Corporations (SPACs) in response to the growing popularity of these investment vehicles in the United States. However, SPACs have garnered little interest north of the border, rendering these rules unused – until now. On April 21, 2015, Dundee Acquisition Ltd. completed its initial public offering of $100 million Class A restricted voting units (each unit containing one Class A share plus half a purchase warrant), making it the first SPAC to go public on Canadian capital markets.
SPACs, also referred to as "blank cheque companies", raise money through an IPO and then cast a wide net in search of a private company to acquire. According to TSX regulations, a SPAC has a maximum of 36 months after listing to complete an acquisition. Funds raised, net of the underwriters' compensation and a percentage withheld to cover working capital and operating expenses (at most 10%), are held in escrow pending either a successful acquisition or the liquidation of the SPAC at the end of the 36-month period. Once a target is identified, majority shareholder approval is required in order to proceed with the acquisition/merger. If approval is obtained, the SPAC proceeds with the transaction and a new, merged entity is formed. Dissenting shareholders retain the option to redeem their shares on a pro-rata basis of the amount held in escrow, typically recovering their initial investment or more. Often, as is the case with Dundee Acquisition, dissenting shareholders also remain entitled to any share purchase warrants attached to the units, providing them with a potential future interest in the merged entity. If, upon expiry of the 36-month period, no acquisition is completed (either because shareholder approval is not obtained or because no target is identified), the funds held in escrow are distributed among the shareholders on a pro-rata basis.
For certain target companies, merging with or being acquired by a SPAC may provide an efficient alternative to a traditional IPO. Companies looking for an easy exit and/or quick access to capital can avoid the hurdles associated with accessing complex debt and equity markets by pursuing the SPAC route. Furthermore, the SPAC comes with significant capital, a broad shareholder base and an experienced management team, all of which may appeal to a small company that would otherwise find it too burdensome to access public markets. Existing management can also remain focused on running its business instead of pursuing a complicated public offering.
Although SPACs may seem like a blind investment for investors, their popularity is growing in the United States. This is mainly because investors are given the opportunity to engage in investments of a private equity nature with downside protection should they disapprove of the ultimate acquisition. Investors are putting their faith in the SPAC's founders, sponsor and management, usually a team of experienced professionals with established track records and with management and M&A experience, to find a viable investment opportunity. These parties' interests are typically aligned with investors through their own financial commitment to the SPAC. Dundee Corporation, which is the sponsor for Dundee Acquisition, purchased an additional $4 million worth of Class B shares, ensuring it too has skin in the game. Lastly, since both the shares and the warrants are traded on public markets, investors may exit at any time by selling their interest in the SPAC.
Despite the potential upside and investor protections, investors should approach SPACs with guarded enthusiasm. SPACs investments differ from private equity funds, which mitigate risk by spreading their exposure among a portfolio of companies. In addition, SPAC promoters may vary in expertise, having included the likes of legendary football coach Lou Holtz and Apple co-founder Steve Wozniak. Sponsors are also often flush with warrants, incentivizing management to strike a deal for personal financial reward.
As with any investment, investors must perform proper diligence when considering a SPAC investment – particularly given the recent entry of SPACs to the Canadian market. Dundee has succeeded in opening the door and paving the way for other SPAC IPOs, marking a step forward in the maturity of Canadian capital markets.