The Special Purpose Acquisition Company, or “SPAC”, is one of the hottest topics in capital markets today. A SPAC is a company that has been incorporated purely to acquire another company or business. The SPAC raises finance to fund the future acquisition by completing an initial public offering (IPO) on a stock exchange. By acquiring a target, the target can become a fully-fledged publicly-listed company without having to undergo the traditional IPO roadshow process to attract investment in the firm.
SPACs have become topical owing to the surge in the US SPAC market in 2020 and 2021. In 2020, nearly 250 SPACs underwent IPOs in the US, raising approximately $83 billion. In 2021, remarkably there were over 600 US SPAC IPOs, raising an astonishing $163 billion. In both years, SPAC IPOs accounted for a majority of US IPOs and nearly a majority of IPO proceeds raised. Furthermore, in 2020, SPACs completed acquisitions valued at nearly $80 billion. In many respects, SPACs propped up the US IPO craze in 2020 and 2021 and contributed significantly to mergers and acquisitions activity, creating value for investment banks, lawyers and other advisers, as well as providing a route for operating companies to enter the listed markets.
SPACs have also become a major talking point in the UK. In August 2021, the rules governing SPACs listed on the London Stock Exchange (LSE) were revised, notionally to make the exchange more attractive to SPAC IPOs. The erstwhile rules provided that trading in shares of the SPAC would be suspended between announcement (or leak) of an acquisition and the completion of that acquisition. The suspension protocol made SPACs unattractive, since SPAC promoters faced challenges in attracting investors who would be locked-into their investments after the announcement of an acquisition. The revised regulations enable SPACs to evade the suspension protocol if they comply with various investor protection measures. The aspiration of the new rules is to attract to the LSE more high-growth, innovative companies at earlier stages of their life cycles. SPAC advocates have long heralded the manner in which SPACs can enable companies that are otherwise closed-off from the public markets to list. An early-stage company with an innovative business strategy may find it challenging to garner interest from public investors at a reasonable price if those investors cannot easily determine the long-term prospects of the company, and such companies may also struggle to procure the underwriter support necessary for a traditional IPO.
This book therefore arrives at an opportune time, with the author presenting years of research that provides an analysis of SPACs from legal, economic and risk perspectives. In Chapter 1, the book outlines its underlying premise – that uncertainty is the main catalyst of money creation and profit maximisation. The examples of the financial crisis of 2008 and the current pandemic-induced economic uncertainty are used as primers to the rise of SPACs. In such a context, SPACs can be seen as a method by which financial participants can monetise opportunities that have emerged from the very uncertainties that have impacted other aspects of the financial industry, such as the debt and traditional IPO markets. After describing SPACs in broad terms, the chapter turns towards introducing the leading actors in SPAC world, before concluding with a teaser of the thesis that permeates the remainder of the book – that increasing financial regulation to reduce risk may be self-defeating. The author, instead, advocates that it is more important that financial risk is priced correctly. The book's placing of SPACs within a paradigm of uncertainty and risk theories is a novel and thought-provoking approach that whets the appetite of the reader for the remaining chapters.
Chapter 2 details the terms and qualities of modern US SPACs by taking a historic look at how the US SPAC evolved. The US SPAC emerged from the blank-check company penny stock controversies of the 1980s and 1990s. Brokers marketed penny stock in cash-shell companies to unsuspecting retail investors with the promise of huge returns from speculative, or, in some cases, non-existent, businesses being sought by those cash-shells. The promoters of the schemes “pumped” up the price of the stock before “dumping” it themselves, leaving retail investors with worthless investments. Rules were enacted to deter the use of such schemes, including a prohibition on trading of securities in the cash-shell before an acquisition. The trading prohibition essentially killed off the blank-check penny stock company, much in the same way as the UK's trading suspension protocol deterred SPAC listings on the LSE. However, SPACs of sufficient size were able to evade characterisation as blank-check penny stock companies. Those SPACs, however, while avoiding the trading prohibition, voluntarily adopted a number of the other conditions that had been imposed by the regulators on blank-check penny stock companies, partly as a result of market forces, and partly to escape the glare of the regulators. Those voluntarily adopted terms evolved over several generations of SPACs. Eventually as the major US exchanges commenced acceptance of SPACs, stock exchange rules were developed that mainly mimicked the conditions that SPAC promotors were voluntarily adopting. The author defines this as the “codification of uncodified market practice” and alludes to the vibrant US SPAC market being a result of such an approach to regulation. The regulatory conditions are no more than the market has itself developed, and leave the market with sufficient freedom to continue to innovate the terms of SPACs.
In Chapter 3, the author engages in a deep-dive into the theory of risk, innovatively phrasing it within philosophical terms, before placing risk within the ambit of the financial markets. The author insightfully notes that financial risk is not only based on objective measures but is also determined by the acts and behaviours of other speculators in the market. The chapter continues to use such a framework to eruditely argue that an inability to measure the subjective determinants of risk renders the use of financial regulation to prevent risk ineffective. The author therefore favours market self-regulation and makes a persuasive argument that rather than eliminating uncertainty in its entirety, uncertainty as constrained by self-regulation can encourage profit and innovation. As a concession to advocates of harder financial regulation, the author notes that concerns over “casino capitalism” can be assuaged by “embedded self-regulation”, or the “codification of uncodified market practice” as previously described. The chapter concludes by neatly bringing SPACs back into the picture. Although investors in SPACs take risks by investing in the vehicle with no knowledge of the final acquisition, terms have evolved that give them protection, such as the ability to redeem their shares for their original investment sum (or, in some cases more) if, after announcement of the acquisition, they do not want to continue to be invested. Through self-regulation, SPACs are able to attract investors who would otherwise be hesitant, and therefore lead to SPACs developing into money creation vehicles that can take advantage of uncertainty to create opportunities. Although the author of this review has written extensively about the potentially perverse incentives that have been created by the self-regulatory generated terms adopted by SPACs, the book very cleverly challenges those who view SPACs with greater suspicion by constructing a cogent ideological and theoretical foundation on which US-style SPACs can be justified.
Chapter 4 of the book adds considerably to the literature by comparing the SPAC approaches of multiple jurisdictions. A comparative analysis of SPAC regulations on various exchanges is timely, since many jurisdictions are currently considering revisions to their SPAC regulations. With the US regulation of SPACs covered in Chapter 2, this chapter surveys the international scene, looking at Italy, Amsterdam, Malaysia, Toronto, Korea and Istanbul. The author proposes a “multi-levelled” definition of SPACs that takes into account their regulatory (or lack of) origins. As the book traverses the global SPAC landscape, it becomes apparent, based on the ideological foundation outlined in Chapter 3, that the author is deeply sceptical of hard law approaches to SPAC regulation and prefers a softer approach like the US where regulation is based upon market terms. Of particular interest to UK readers is a section discussing what was, at the time of the book's writing, the proposed new regulations for SPACs. The final regulations discussed above are almost identical to those that were proposed, so the discourse in the book is up-to-date and pertinent. Unsurprisingly, the author is supportive of the UK tempering its trading suspension protocol. However, the author clearly believes that certain of the UK's new regulations that move beyond market practice in the US could hinder the ability of SPAC sponsors to raise capital creatively and hurt the UK's SPAC market. Time will tell whether the UK SPAC market is dead-in-the-water or whether it begins to resemble the US. Notwithstanding the points raised above, the chapter notes that we may be beginning to see a form of international convergence, with many of the SPAC terms imposed by jurisdictions flowing from the terms that have developed organically in the US market.
In Chapter 5, the acquisition stage, or “de-SPAC”, is described and provides an invaluable guide to the process and regulations apparent in the US as SPACs acquire operating companies. Of particular note is a description of the “PIPE” (private investments in public equity) transactions that have become almost ubiquitous as SPACs complete acquisitions. Since, in the US, SPAC IPO investors are given the right to redeem their shares prior to completion of the acquisition, as funds flow-out of the SPAC, the sponsor has to fill the gap to ensure the relevant acquisition can complete, and, therefore, employs PIPE financing. The PIPE represents one of the strangest aspects of the modern US SPAC, with large swathes of IPO investors replaced by PIPE investors as an acquisition is completed. The chapter also usefully summarises some of the types of litigation to which SPACs are subject in the US, which will give a reader an inkling of some of the types of issues and conflicts that can emerge with US SPAC structures.
The final chapter returns to the theoretical underpinnings of the book, identifying that financial markets are determined by three main features – uncertainty, competition and innovation. However, the chapter extends the theoretical characterisation of financial markets by describing them as “open systems” involving complex interactions between market participants, leading to the domination of financial risk. The author maintains that speculators or entrepreneurs in the market can embrace the uncertainty of the markets to convert risk into profit. The chapter finishes by determining that the SPAC is a child of uncertainty and a “financial innovation(s) for controlling uncertainty and absorbing it through profit creation”.
The book concludes with an ode to SPACs and the benefits that they can provide to the market. In the interests of full disclosure, the author of this book would probably describe the author of this review as a “SPAC disbeliever”. As a SPAC believer, one would express concern at the manner in which the incentives created by US SPAC terms could potentially harm certain investors and lead to companies unsuited to the public markets becoming listed. Furthermore, a SPAC disbeliever would point to the possibility that the benefits of SPACs could be replicated through less hazardous (although less lucrative for promoters) listing mechanisms. Although the book does not canvass those points in detail, this does not make the book any less worthy as an original and imaginative contribution to the determination of the nature of SPACs. It makes a compelling argument in favour of SPACs, allowing the reader to decide for itself whether the persuasive theoretical framework to SPACs, thoroughly elucidated in the book, ultimately justifies their existence in contemporary form. This is an excellent book that adds to the rich literature on SPACs and is essential reading for those interested in SPACs and equity market innovations generally.
