Demystifying SPACs

It’s all about optionality

2020 saw a surge in IPOs, with more than $300B raised globally and $180B raised on U.S. exchanges.[1],[2]  One trend that caught the attention of investors, companies and the news media was the dramatic rise in special purpose acquisition companies (SPACs) as an alternative to the traditional IPO. SPACs made up 50% of IPOs in the U.S. in 2020 ($83.4B).[3] The amount raised through SPACs in the first three months of 2021 already exceeded the total raised in 2020.[4]

The SEC recently issued new guidance with respect to the accounting rules governing SPACs and warrants in particular. While this has raised questions and some degree of “FUD,” the option remains viable and worthy of consideration today.

SPAC Explained

From a process standpoint, a SPAC is an IPO in reverse.

The IPO starts with the registration process: hold an organizational meeting, draft the prospectus, file registration documents with the SEC, pitch to potential investors through a roadshow, determine the valuation and list the company (aka “go public”).

With a SPAC, the relative valuation of the companies comes first and is based on their assets: tangible cash in trust and the intangible value of the listing. The SPAC is publicly listed and while it does have tangible cash in trust and the intangible value of the listing, the market is pricing the SPAC every day. The target company is a negotiated valuation between the target company and the SPAC. The relative valuations will determine the pro forma ownership of the combined company.

The founders own approximately 20% of the shares, leaving 80% to be held by public shareholders. Next, the SPAC goes through the IPO process and becomes a public entity.

The SPAC team then markets to investors the 80% of shares that will be invested in whatever promising start-up they can find. Once they find that investment target (within 18-24 months), they acquire it and “de-SPAC,” which makes that private start-up a public company.

Relevance to Life Science Companies

The path to market for a life science company is long, complex and incredibly capital intensive. We’ve all heard the line – it takes 10 years and $1B to get a drug to market. While this may be perceived as urban legend, the timing and costs are certainly not far off from reality.

It is very hard to measure or in some way portend the success of experimental science at a very early stage. The only way for a company to make it to the point where the company’s technology or product candidates can demonstrate proof of concept/principle is to gain access to the capital markets. The private markets just can’t sustain a company for that length of time with that amount of capital. They are putting too much at risk.

SPACs offer a viable alternative path to market, which is empirically a good thing. They attract investors by leveraging the power of diversification. Let’s say a company has $100M to invest. It is more attractive to spread that investment across 20 SPACs at $5M each, versus $33M invested into only three companies. In this way the SPAC presents a great outlet for not only companies but their investors.

Advice to Life Science Leaders

For a life sciences CEO or CFO participating in a SPAC for the first time, our key piece of advice is to listen. The SPAC process is new, different and complicated with many nuances. You will learn a tremendous amount, so it is important to listen to the market, to your advisors and to really think through and consider what you hear. The more questions you ask and the more you listen, the smoother the process will be.


[1] The IPO SPAC-TACLE, Goldman Sachs, January 28, 2021, https://www.goldmansachs.com/insights/pages/top-of-mind/the-ipo-spac-tacle/report.pdf

[2] Sizzling U.S. Stock Markets Await Next Leg of Record IPO Run, Bloomberg, December 31, 2020, https://www.bloomberg.com/news/articles/2020-12-31/sizzling-u-s-stock-markets-await-next-leg-of-record-ipo-run

[3] The IPO SPAC-TACLE, Goldman Sachs, January 28, 2021, https://www.goldmansachs.com/insights/pages/top-of-mind/the-ipo-spac-tacle/report.pdf

[4] U.S. SPACs overtake 2020 haul in less than three months, Reuters, March 17, 2021, https://www.reuters.com/article/us-spac-usa-ipo-idUSKBN2B919O