Massive Slowdown in SPAC Activity

‍Over the past couple of years, SPAC (special-purpose acquisition company) activity has been a rollercoaster, reaching its lowest levels in July of this year. Compared to 2021, which saw 362 SPAC IPOs priced within the first two quarters, 2022 only had 69 SPAC IPOs priced during the year's first half. This year also had the largest number of SPAC deals withdrawn from the market, that being 143 SPAC IPOs withdrawn.

‍Many factors affecting the rest of the world, like rising inflation and macroeconomic uncertainty, influenced the slowdown of SPAC activity this year. However, other factors were also strongly involved in the deceleration of activity and the uncertainty in SPACs as 2023 approaches.

The 1% Excise Tax, accompanied by an increase in liquidation, new SEC (Securities and Exchange Commission) proposed rules, and an increase in SPAC-related litigation, all played their part in the slowdown of activity while also causing apprehension of future SPACs heading into 2023. Let’s take a closer look at these disruptors and what future opportunities await SPACs.

Excise Tax

As part of the Inflation Reduction Act signed into law on August 16, 2022, the new 1% excise tax will be imposed on stock repurchases by publicly traded corporations after December 31, 2022. Though the provisions of this new law are broad, it has the potential to cause a further negative impact on the use of SPACs.

With this looming tax on SPAC teams’ minds, many are rushing to liquidate before January 1, 2023. Some SPACs expiring in Q1 of 2023 may also choose to accelerate their expiration before the end of the year. As of the beginning of November, 43 SPACs liquidated in 2022, with speculation of the cause being this new excise tax. These liquidations have gradually grown throughout the year, seeing a significant spike in Q3 and 18 liquidations just in October alone.

Though most SPAC teams perturbed by this tax are rushing towards liquidation, the brave few who have chosen a different route risk becoming subject to the excise tax. Some SPACs will decide to cover the tax out of sponsor capital, while others will cover the tax with the trust’s funds. The beginning of 2023 will be the true teller of what these SPAC teams do in the face of the excise tax.

SEC Rules and Turmoil

The start of Q2 2022 brought a list of proposed rules governing SPACs from the SEC. These proposed rules aim to bring SPAC deals in line with the constraints that exist for traditional IPOs. The reaction to the SEC’s rules was adverse and only added to the slowdown in SPAC activity.

With new rules in the space, SPAC participants also face challenges with the SEC review process, including longer transaction timelines and increased comments. These rules and other challenges aren’t encouraging for SPAC teams as they only add to the slowdown of activity and indefinite future. What once made SPACs so attractive to the capital markets may now be leveling the playing field in assessing how to execute a public transaction.

Increased Litigation

Since the end of 2021, there has been a significant increase in lawsuits and demands against SPACs. This start came after the large volume of new SPAC activity in 2021. As time passed, these lawsuits transitioned to various parts of the SPAC lifecycle. With the increasing number of SPAC liquidations and withdrawn transactions, there is a new opportunity for litigation. Furthermore, the SEC proposed rules could significantly impact SPAC-related litigation in 2023.

Opportunity for the Future

Although SPAC activity was understandably down this year, October brought the largest SPAC merger announcements since December 2021. Market participants are taking on the current challenges and exploring creative strategies to pursue transactions.

While the typical SPAC business combination targets are high-growth companies in the pre-revenue stage, 2022 saw combinations of companies with consistent revenues. This year also saw SPAC transactions involving companies outside the technology sector, including construction, transportation, hospitality, and mining targets. Also, there were more opportunities in emerging markets this year. In the first half of 2022, 10.4% of business combination targets were headquartered in emerging economies, compared to 4.2% in the first half of 2021.

Another opportunity market participants have been taking advantage of and will likely continue to with the indefinite future of SPACs, is bringing on a partner during the public company readiness process.

“The SPAC process can be cumbersome but provides an opportunity for teams to bring on a trusted partner to provide the necessary expertise,” said Kris Pratte, Director at Clearview Group. “Platforms, like Workiva, provide SPAC teams solutions for SEC filing, management reporting, and even SOX (Sarbanes-Oxley).”

If you need help navigating the impacts of SPAC activity on your business, contact Kris Pratte. Or, if you are interested in implementing Workiva into your SPAC process, contact Mike Molloy.