Special Purpose Acquisition Companies (SPACs), and in particular SPACs targeting companies in the clean-energy space, were the capital markets story of 2020. According to data from SPACInsider, initial public offerings (IPOs) of SPACs raised a record of over $83 billion in more than 248 IPOs in 2020, constituting nearly half of all 2020 IPOs and representing an increase of more than five times the amount raised in 2019's record year. Over a dozen of the SPACs raised in 2020 were formed to take clean-energy companies public through an acquisition (a de-SPAC transaction), including companies focused on electric vehicles, battery storage and LIDAR.
While SPACs have been around for almost three decades, the recent entry of exceedingly reputable players in the SPAC market, the high-profile targets acquired, and unstable market conditions for traditional IPOs in recent years have thrust SPACs into the mainstream. The COVID-19 pandemic has only exacerbated issues related to traditional IPOs as it injected a level of volatility into the capital markets that left companies uncertain as to the prospects (both good and bad) of their IPOs. More to the point, the difficult commodity price environment for traditional oil and gas companies since late 2014, compounded by the dual demand shock of 2020 caused by COVID-19 and the OPEC+ negotiation breakdowns, have led some energy investors (including some traditional oil and gas investors) looking for an alternative.
SPACs are entities formed to raise capital through an IPO for the purpose of taking an existing private company public via the de-SPAC transaction. SPACs have no immediate business purpose or commercial operations of their own, and prior to closing its IPO a SPAC cannot have identified a target for the de-SPAC transaction.
After formation, a SPAC goes through a typical IPO process; however, disclosure is often reduced because the SPAC has no operations and limited financial and ownership information. The IPO prospectus is mostly a discussion of the management team and sponsor, the terms of the SPAC, and the future acquisition strategy. In its IPO, SPACs typically sell units to the public comprised of one share of common stock and a fraction of a warrant to purchase a share of common stock in the future at a price above the IPO valuation. The warrants serve as an inducement for the investor to participate in the potential upside of the investment. The IPO proceeds are deposited in a trust account and generally may not be released except as part of the de-SPAC transaction or to redeem the public's common stock upon liquidation.
The consummation of the IPO starts the clock to complete the de-SPAC transaction within a set time frame, usually 18–24 months. If a de-SPAC transaction does not occur during this time frame, the SPAC must liquidate and return the trust account balance to the SPAC shareholders. Once a target is identified and the acquisition is approved by the SPAC Board, the deal is typically put to a vote of the SPAC shareholders, who can request that their shares be redeemed for cash in the trust account, even if they vote in favor of the deal. This allows them to recover their initial investment in the SPAC, while still retaining their warrants if they choose to do so. If they do not like the de-SPAC transaction, this would provide them the ability to exit the SPAC with their entire initial investment.
The de-SPAC transaction is typically documented by a merger, business combination, or purchase agreement to acquire a business or its assets. Unlike in a traditional IPO, the nature of the de-SPAC transaction can provide greater pricing certainty to the target with a negotiated purchase price, as well as greater flexibility through negotiated provisions such as earnouts.
Many clean-energy companies are early stage, with little to no revenue. These companies also have a tendency to be capital intensive. SPACs can be an attractive vehicle to invest in clean-energy companies, as investors have the ability to exit (in the form of the redemption right) if they do not like the deal. In addition, unlike in a traditional IPO, the SEC disclosure associated with a de-SPAC transaction can contain projections regarding expected future performance, allowing the clean-energy company to tell its story to potential investors in a way that is not possible in a traditional IPO. The access to public markets that clean-energy companies obtain through an acquisition by a SPAC can help provide the capital necessary to commercialize a product. In addition, investor demand for ESG-focused companies has led many to seek out environmentally-friendly options in the public market, as evidenced by the names of SPACs (e.g., “Decarbonization Plus Acquisition Corp., Climate Change Real Impact I Acquisition Corp., etc.).
However, there are risks associated with clean-energy SPACs. The frothy valuations ascribed to these companies in 2020 have led to some volatile stock prices, the highest profile of which involved Nikola Corporation. Following its merger with a SPAC, Nikola’s stock price immediately skyrocketed, only to subsequently collapse as new facts came to light evidencing a perhaps inflated product. In addition, many clean-energy companies and technologies are nascent, with limited operational history or proven efficacy. Whether access to public markets for clean-energy companies through SPACs is a lasting current is a trend worth watching in 2021.
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