The Ultimate Guide to SPAC Sponsorship
The Ultimate Guide to SPAC Sponsorship
Sponsorship entails providing the most high risk capital to the formation and operation of the SPAC. In most cases it also includes providing the management team to the SPAC after the IPO.
Characteristically, the sponsor capital is utilized to:
The capital provided by the Sponsor generally represents 5% to 7% of the anticipated SPAC IPO gross proceeds. For example, if you plan to raise $200M in your IPO, the sponsor capital must be at minimum $10M.
The SPAC sponsor team must be led by individuals who meet the following criteria:
Historically, SPAC Sponsors needed to raise an amount to serve as risk capital or “sponsor capital” equal to between 3% and 5% of the projected public capital raise for the SPAC.
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. The remainder will be utilized during the duration of the SPAC as working capital. This covers things like compliance and costs associated with identifying a target for the initial business combination.
Today, as the proliferation of SPACs has resulted in the SPAC market becoming more competitive and institutions demanding revised terms, we advise sponsor team to seek sponsor capital equal to up to 7% of the projected public capital raise for the SPAC. There may be requirements to overfund the trust established for the benefit of the public investors in the SPAC and to pay for time extensions resulting from shorter SPAC duration.
The risk capital does not need to come solely from the management team. Many management teams will bring external investors into the sponsor capital. ClearThink Capital can assist sponsor teams with their sponsor capital raises.
All of the sponsor shares issued and outstanding prior to the date of the SPAC IPO are generally placed in escrow with a trust company or transfer agent, as escrow agent, until:
(1) with respect to 50% of the sponsor shares: the earlier of six months after the date of the consummation of the initial business combination and the date on which the closing price of the common stock equals or exceeds a predefined public closing price per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after the initial business combination and
(2) with respect to the remaining 50% of the insider shares: six months after the date of the consummation of the initial business combination, or earlier. In either case, if, subsequent to the initial business combination, the SPAC consummates a liquidation, merger, share exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares for cash, securities or other property.
It’s very important for SPAC Sponsors to pick the right professionals. When ClearThink Capital works with a sponsor group to assist sponsors in selecting investment bankers, we look at the following factors:
When we assist sponsors in selecting lawyers and accountants, we look at the following factors:
Although there have been a number of exceptions, a SPAC is best used to make a single platform business combination followed by other business combinations. Whenever multiple companies are simultaneously or nearly simultaneously acquired, the level of complexity and the difficulty of valuation increases exponentially. Notwithstanding this fact, a SPAC can be used to acquire multiple companies followed by a roll up.
Typically, the SPAC management team is not compensated. The sponsor receives a 20% equity carry in the SPAC (e.g., shares equal to 25% of the shares sold in the SPAC IPO) and additional securities purchased by the sponsor in exchange for the sponsor capital.
While costs can vary, we advise sponsor teams to budget $1 million to get them through the public offering process, exclusive of commissions. This amount typically covers advisors, lawyers, and accountants.
Generally, investment bankers receive a commission of 5.5% of the SPAC proceeds. 2.0% is paid at the closing of the SPAC IPO and 3.5% is paid upon consummation of the initial business combination.