June 05, 2012
Posted by Usha Rodrigues

Faithful Glom readers know that Special Purpose Acquisition Corporations (SPACs) have been on my mind for some time.  SPACs are a type of "blank-check" company that goes public in order to raise money, and then begins a hunt for a target. The beauty of the SPAC model is that going public is easy--the SPAC is basically a shell, so disclosures are minimal and cheap.  If and when the SPAC acquires a target, (usually a private company) that target immediately becomes public without the hassle of an IPO.  Some call it a "back-door" IPO--but please don't associate SPACs with the more seedy reverse mergers that led to so many Chinese companies with questionable accounting practices going public.  They're different, trust me.

I wondered what effect the JOBS Act would have on the SPAC market.  Because JOBS' "on ramp"/emerging growth company option makes it easier and cheaper from young corporations to go public, I figured JOBS would make SPACs relatively less attractive. Why use a SPAC when you can just go public on your own? 

I have to admit, I never considered that SPACs themselves would opt to go public as emerging growth companies.  But according to the WSJ,

Just eight weeks after [JOBS']passage, however, more than a dozen of the companies seeking to use its looser rules for going public aren't the type of high-tech growth companies lawmakers had in mind.

"Special-purpose acquisition companies" and "blank check" companies, basically empty shells with almost no employees that are used in mergers or as a backdoor route to U.S. stock listings, have been quick to identify themselves in regulatory filings as "emerging growth companies."

The article quotes Meredith Cross, director of the SEC's Division of Corporation Finance, as having examined whether "trusts that collect music and movie-royalty payments, or structures used to create tax-free corporate spinoffs" could qualify as emerging growth companies.  "These are not companies that are job creators," she observes. 

JOBS Act, meet the Law of Unintended Consequences.  Nothing in JOBS requires that EGCs be job creators--they just have to "total annual gross revenues of less than $1 billion." Ms. Cross is apparently reluctant to label SPACs and blank-check companies as non-job-creators--she points out that SPACs can lead to private job-providing companies to become public, thus qualifying as job creators.  But the statute doesn't require jobs creation, so I don't see why we care.   Is the scandal that some companies that don't create jobs are benefiting from the law?  I am shocked, shocked.

As to SPACs using the on-ramp, at first I didn't get it.  SPACs' disclosures are largely boilerplate, along the lines of "we have this much money, it earned this much interest"--at least until they acquire a target. In other words, it's pretty easy for them to go public already.  Why bother with the on-ramp?

But Stuart Neuhauser of Ellenoff Grossman & Schole LLP explains that if his client Infinity Cross Border Acquisition Corp. does acquire a target, "[w]hen we become an operating company the savings could be enormous."   Ah, this makes sense--EGC status lasts up to 5 years, as long as your revenues, market cap, and debt issuances stay low, and with that status comes "scaled-back disclosures, certain exemptions to executive-compensation disclosures and attestation requirements for the auditors."  So a private company looking to go public on the cheap (even cheaper than by way of the JOBS Act's on-ramp) might well favor an EGC acquiror that promises lower disclosure burdens over a traditional public company that would require more in-depth disclosure when the target eventually goes public. 

According to the article, Neuhauser thinks "most SPACs will bill themselves as emerging-growth companies."  Very interesting...


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