For federal income tax purposes, the warrants received are treated as investment warrants as long as the issuance of the warrants is not dependent on the sponsors employment status or in exchange for services provided as an employee of the SPAC. . This Form 8-K is known as a Super 8-K and must contain all the information that would be required in a Form 10 registration statement (the registration statement for companies that become public reporting companies other than through a registered IPO). The warrant agreement also contains an obligation for the SPAC to register the issuance of public shares upon exercise of the public warrants. Learn more. The sponsor will pay a nominal amount (usually $25,000) for a number of founder shares that equals 25% of the number of shares being registered for offer to the public, inclusive of the traditional 15% green shoe. In those cases, the sponsor purchases founder warrants at a price of $1.50, $1.00 or $0.50 per warrant, depending on whether the public warrants are exercisable for 1/3, 1/2 or 1 share, respectively. (go back), 7Some SPACs have shorter periods to consummate the De-SPAC transaction, with examples as short as 12 months, or more frequently 18 or 21 months. SPAC charters for Delaware SPACs typically waive the corporate opportunity doctrine as applied to the SPACs officers and directors. The letter agreement also documents the agreement of the officers, directors and sponsor to waive any redemption rights that they may have with respect to their founder shares and public shares, if any, in connection with the De-SPAC transaction, an amendment to the SPACs charter to extend the deadline to complete the De-SPAC transaction or the failure of the SPAC to complete the De-SPAC transaction in the prescribed timeframe (although the officers, directors and sponsor are entitled to redemption and liquidation rights with respect to any public shares that they hold if the SPAC fails to complete the De-SPAC transaction within the prescribed timeframe). In addition, if the SPAC hits the outside date for consummating the De-SPAC transaction or seeks to amend its charter documents to permit an extended period to consummate the De-SPAC transaction, it will be required to redeem the public shares (or offer to redeem, in the case of a charter amendment) for their pro rata portion of the amount held in the trust account. Often, existing investors in the SPAC will invest in the PIPE transaction, demonstrating their support for the de-SPAC business combination. Special Purpose Acquisition Companies (SPACs) are companies formed to raise capital in an initial public offering (IPO) with the purpose of using the proceeds to acquire one or more unspecified businesses or assets to be identified after the IPO. . Therefore, gain may be avoided if the shares are sold immediately after the exchange. Joint Filing Agreement February 14th, 2023 SHUAA SPAC Sponsor I LLC Blank checks. The SPAC sponsor's capital is used to create the SPAC. Some, like the certificate of incorporation and registration rights agreement, have analogs in traditional IPOs of operating companies, while others are unique to SPACs. However, within 52 days after the IPO, the units are severed, and the class A shares, often referred to as the public shares, and the warrants, often referred to as the public warrants, may be traded separately. For example, the staff will ask about other SPACs that the sponsor has formed, particularly where they may compete for the selection of a target (see below), and about the percentage of shares in the SPAC that the sponsor controls and the influence the sponsor and other private investors will have on the vote to approve the business combination transaction with a target. "As previously reported, on November 16, 2022, Sagaliam Acquisition Corp., a Delaware corporation ("Sagaliam"), entered into a Business Combination Agreement (the "Business Combination Agreement") by and among Sagaliam, Allenby Montefiore Limited, a private company limited by shares organized and existing under the Laws of the Republic of Cyprus ("PubCo"), AEC Merger Sub Corp., a . At least for the period while the search for the target is ongoing and prior to its acquisition, investors enjoy downside risk mitigation. Mallard Pointe 1951 LLC is the ownership entity of Mallard Pointe and is a partnership of local families. For example, the warrant agreement can be amended by a vote of the warrant holders, the registration rights agreement can be superseded by a stockholders agreement, charters and bylaws are often amended, etc. In a SPAC IPO, the underwriters will receive a discount of 5.5% of the gross proceeds, but only 2% of the discount will be paid at the closing of the IPO. Board of Directors Declared Total Dividends of $0.66 per Share for First Quarter 2023. The sponsor manages the IPO process, including the selection of the lead underwriters to conduct the IPO, the auditors for the SPAC and counsel to prepare and file the Form S-1 registration statement with the SEC. Recognizing the potential in SPACs, private equity firms and professionals have been assuming the role of SPAC sponsors in recent years. In a traditional IPO, the sponsor and directors and officers sign a lock-up agreement for 180 days from the pricing of the IPO. From the decision to proceed with a SPAC IPO, the entire IPO process can be completed in as little as eight weeks. Each unit is customarily priced at $10.00 per unit, and the warrant is usually priced out of the money, with an exercise price greater than the per unit price offered in the IPO, typically $11.50 per share. At the closing of the IPO, the founder shares will represent about 20% of the SPACs outstanding shares. In addition to the contracts and documents described above, the SPAC also adopts bylaws in connection with its formation, which are relatively standardized among Delaware SPACs and contain customary provisions for a publicly traded Delaware corporation. Since a SPAC is not operating a business, the SEC staff review can be more streamlined, and the SPACs registration statement will take considerably less time than an operating companys registration statement to be declared effective. The best way to use this guide is to identify issues that may impact you, and then discuss them with your tax advisor. com currently does not have any sponsors for you. A SPAC will file a registration statement on Form S-1 with the U.S. Securities and Exchange Commission to register the units, the public shares and the public warrants issued in its IPO. (go back), 2Other investments raise Investment Company Act considerations for the SPAC during the period before it completes its De-SPAC transaction, as well as risk issues around whether the trust account will have sufficient cash to return $10.00 per public share to public shareholders on a redemption or liquidation. SPAC formation and funding. In addition, the publicly traded shares will have a stepped-up basis when subsequently sold in the market. Even if a shareholder vote is not legally required, the SPAC could elect to put the De-SPAC transaction to a shareholder vote for business reasons. They also limit the ability of the SPAC to utilize funds in the trust account, (excepting certain specified uses), require the SPAC to offer to redeem the public shares, and set the minimum size for the target business in a De-SPAC transaction. In most instances, a SPAC will not hold a public election for directors until the De-SPAC transaction or thereafter, and some SPACs provide that only the founder shares vote in director elections until the De-SPAC transaction. The SEC often requires [8] disclosure in the IPO prospectus to the effect that the SPAC currently does not have any specific business combination under consideration and that the SPACs officers and directors have neither individually selected nor considered a target business for the business combination nor have they had any discussions regarding possible target businesses among themselves or with underwriters or other advisors. In connection with closing the IPO, the SPAC will fund a trust account with an amount typically equal to 100% [1] or more of the gross proceeds of the IPO, with approximately 98% of the amount funded by the public investors and 2% or more funded by the sponsor. Much of the information in the Super 8-K will already have been included in the SPACs proxy statement or tender offer materials for the De-SPAC transaction, but the Super 8-K may require additional financial statement information for the target business. A SPAC investment has certain attractions for these investors. The over-allotment option in traditional IPOs (commonly referred to as a green shoe or just the shoe) typically extends for 30 days from pricing, while the option in SPAC IPOs typically extends for 45 days. Partner, National Corporate Tax and Mergers & Acquisitions Technical Practice Leader, Managing Director, National Corporate Tax and Mergers & Acquisitions, Business Restructuring & Turnaround Services, Total Tax Transparency & ESG Tax Strategy, Financial Institutions & Specialty Finance, Important Tax Issues When Navigating a SPAC Transaction, BDO Knows SPACs: Tax Treatment of SPAC Founders Shares, Special Purpose Acquisition Companies Resources page, Do Not Sell My Personal Information as to BDO Investigative Due Diligence, Strategic partners and management expertise; and. In 2020 through December 14, the value of SPAC investments has more than quintupled with $77.5 billion raised across 230 IPOs. Thank you. Prior to the closing of the IPO, the SPAC does not have sufficient cash to pay such fees, so the sponsor enters into a promissory note with the SPAC to loan funds to the SPAC until completion of the SPACs IPO. The warrants become exercisable on the later of (i) 30 days after the De-SPAC transaction and (ii) the twelve-month anniversary of the SPAC IPO. Of the sponsor capital, the initial underwriting fees of 2% of the SPAC and the costs of the IPO will be deducted at the closing of the IPO. A SPAC typically needs to raise additional capital to complete the de-SPAC business combination transaction. Management teams need to plan ahead and be prepared for the financial reporting and SEC filing . Today, consideration must also be given to a de-SPAC transaction in lieu of an IPO. Regardless of whether the merger qualifies as tax-free, any consideration received other than SPAC voting stock, i.e., cash or other property (referred to as boot), will be taxable to the target shareholders. If no De-SPAC transaction occurs, the deferred 3.5% discount is never paid to the underwriters and is used with the rest of the trust account balance to redeem the public shares. This will result in a more involved transaction structure and may introduce complex tax issues. The necessary audit or reaudit of the target companys financial statements is thus often a gating item for the De-SPAC transaction, and if the financial statements are not auditable, the target business is not suitable for a SPAC acquisition. Although SPAC-related litigation has been relatively infrequent to date, that is likely to change given 2020's explosion in SPAC IPOs. This was more than four times the $3.5 billion they raised in 2016.. The number of founder shares is sized to be 25% of the amount of public shares initially registered on the registration statement, but will be increased or decreased through a stock split, dividend or forfeiture to size the founder shares to 25% of the number of public shares ultimately sold. The 2023 BDO CFO Outlook Survey offers critical insights to support strategic decision-making and help your company thrive. Kramer Levin Naftalis & Frankel LLP. A common question is whether the sponsor should be a portfolio company of one or more existing funds or a subsidiary of the investment manager. The common stock included in the units sold to the public is sometimes classified as Class A common stock, with the sponsor purchasing Class B or Class F common stock. . SPACs enter into a letter agreement with their officers, directors and sponsor. There are three distinct phases in the life of a SPAC: SPAC formation and IPO, SPAC target search, and the SPAC merger (de-SPAC). Many contain features to automatically extend the period if a definitive agreement or letter of intent is signed by the end of the specified period or upon contribution of additional capital into the trust account by the sponsor. Depending on the timing of the transaction, the proxy statement or tender offer materials are required to include two or three years of audited [9] financial statements of the target business, plus unaudited interim financial statements. 0 0 After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the business combination). The merger generally needs to happen within 18-24 months of the IPO. This will require the preparation, SEC review and dissemination to the SPAC shareholders of a proxy statement.