After a series of roller-coaster years for the SPAC market, investors and sponsors are finding ways to improve transaction integrity

SPACs have never been confronted with such a difficult environment, for several reasons. The overhang of the SEC’s proposed regulations regarding misleading financial projections has had a significant ripple effect. It is now extremely difficult to find banks willing to commit after exiting the market almost overnight at the end of March. This has delayed transactions as accountants accept information that needs to be disclosed, and legal advice now takes longer as well. The due diligence bar was set much higher before a de-SPAC deal could be announced, stalling activity.

This is the regulatory angle. Then there is the lack of risk appetite for these transactions. There were high levels of redemptions from retail investors once the transaction targets were announced. This is partly a function of the broader shift from high growth risk assets with a distinct tech flavor, a favorite of SPACs, in favor of stable income and commodity plays amid the economic downturn and resulting bear market. .

A number of high-profile SPAC deals also fell far short of expectations, prompting closer scrutiny from the SEC. This means sponsors need more PIPE capital, which has been equally unpredictable, from institutional investors to close their deals.

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However, the worst may already be over for the SPAC market. Sponsors and banks have adopted a more cautious sentiment in the past three months since the SEC announced its proposal, but stakeholders are quickly adapting.

One of the most exciting recent developments in the SPAC space is the innovation of agreements. For example, in July, FAST Acquisition Corp. II entered into a merger agreement with Falcon’s Beyond, an entertainment development company specializing in the creation and expansion of intellectual property, in a de-SPAC transaction with a pro forma enterprise value of $1. billion. The agreement is notable for introducing a unique structure in which shareholders who do not redeem their shares will receive 50% of their shares in the form of convertible preferred shares with a considerable dividend of 8% and a conversion price of $11 and 50% common stock. Additionally, 20% of the Founder Shares held by the FAST II sponsor were confiscated and contributed to a bonus pool allocated to unredeemed shareholders and PIPE investors, which deterred the abandonment of the deal.

This is just one example of how investors and sponsors have an abundance of options to improve transaction integrity and ensure they cross the finish line. Once the stock market bottoms out and SEC regulation becomes clearer, SPAC IPOs and SPAC deletion activity should be in line for a recovery. The frenzy of the first quarter of 2021 is unlikely to be repeated, but there will be plenty of room for growth in the US SPAC market as the interest rate cycle comes to an end.

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