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Special Purpose Acquisition Company - SPAC

SPAC though can be traced back in history back to 1993, when first created by David Nussbaum. In layman’s terms, they are created for a special purpose of acquisition or merger.

The popularity of SPACs has witnessed a drastic increase during 2021, with approximately 500 SPAC issuances through October 2021. This is despite a reality check in April (wherein 300 SPAC issuances were completed between January - March 2021) after SEC issued new accounting and reporting requirements for SPAC entities, which impacted the new issuances.

A special purpose acquisition company (SPAC), also called a “blank-check” company, has no commercial operations and is formed for the sole purpose of raising capital through an initial public offering. After the IPO, SPAC has 18 to 24 months to identify and complete an acquisition. Once acquired, founders will profit from the stake in the new company, which is usually 20.0 percent of the common stock. Additionally, investors get units in the new entity, with each unit comprising a common stock and warrant acquiring one or a fraction of one common stock.

After certain days of closing of the IPO (generally 52 days), IPO units are separated into common shares and warrants with each of them individually trading on the stock exchange.

During late 2020 and 2021, SEC issued certain guidance and staff statements with respect to the disclosure requirement of SPACs. Typically, a SPAC entity may require to report the fair value of potential earnout, founder shares (which may be shared or cash settled), and warrant fair value (which may need to be re-classified as a liability).

We utilize sophisticated and generally accepted valuation methodologies and modeling techniques to determine the fair value of these instruments.

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Given the complex nature of the contractual terms of the SPAC financial instruments, typically complex valuation methodologies such as Monte Carlo Simulation is considered appropriate for most cases. You are either a sponsor group in a SPAC entity, a company planning for raising financing through SPAC, a De-SPAC transaction, or an investor with a legitimate interest in SPAC units; we EquitAdvisors offer customized solutions for your needs.

PRIVATE

PLACEMENT

WARRANT

As part of SPAC transaction, Public Warrants as well as Private Warrants are issued to certain investors. Though price of Public Warrants is well known through exchange, the price of Private Warrants are not typically known. 

The fair value of these warrants are dependent on future stock price of the SPAC or de-SPACed entity. Thus, sophisticated stochastic models are utilized to estimate fair value of these Private Warrants.

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EQUITY

EARNOUT

SHARES

As part of SPAC merger, often an earnout component is added as a sweetner. The number of shares to be issued as part of this earnout is dependent on the stock price breachinig certain threholds over a duration of certain years. 

Generally monte carlo based simualtion methodology is considered to estimate fair value of these instruments, given its dependency on future stock price.

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FOUNDER

SHARES

These are also called "Class B Shares" and are issued to sponsor for a nominal amount. these comprise of 20.0 percent of the overall entity, and are issued at relatively lower valuation to SPAC sponsors, to incentivize them for the risk considered.

Success factor of SPAC acquisition forms a major assumption in the fair value of Founder Shares. Additionally, monte carlo simulation methodology is also utilized given the nature of instrument.

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CONVERTIBLE 

DEBT

After SEC's whip on booming SPAC market, we have witnessed innovative and unique financing ways in this market. Convertible note are one of these instruments which now-a-days is very popular among the de-SAPC transactions.

These notes typically have a 5-year commitment with semi-annual payment structure and 6.0%-8.0% of interest coupled with conversion price ranging between $11.5 - $12.0 per share.

Typically a binomial model is considered appropriate for such instruments, given the stochastic nature of market interest rates, which form major role in fair value of these instruments.

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Our team has experience working with various SPAC entities with varying levels of involvement and thus are aware of the SPAC process, requirements, and SEC compliance requirements.

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