Impressive Growth in the SPAC Markets

In recent years, a new class of blank check acquisition companies that are generically referred to as special purpose acquisition companies, or "SPACs," have become very popular on Wall Street. The SPAC structure allows a blank check company that prices its offering at $5 or more per share to by-pass Rule 419, conduct a large underwritten IPO, and then go out looking for one or more acquisitions candidates that can effectively put the IPO funds to work. Unlike a Rule 419 shell, the shares of a SPAC can actively trade on the Amex or OTC Bulletin Board while the SPAC is searching for a target.

While SPACs are technically exempt from Rule 419 because of their higher offering price, most SPAC offerings invariably include voluntary escrow arrangements, require shareholder approval of proposed acquisitions and provide for refunds if a shareholder does not approve a proposed acquisition.

Since January 2005, a total of 130 SPACs have registered IPOs and raised unallocated capital pools ranging from $18 million to $900 million.

• In 2005, the average IPO size of 28 new SPACs was $75.8 million.

• In 2006, the average IPO size of 36 new SPACs was $85.5 million.

• In 2007, the average IPO size of 66 new SPACs was $166.9 million.

The average proposed IPO size of the 52 active SPACs that have filed or amended their IPO registration statements during the last three months is $228 million. 

In general, SPACs are designed to serve as acquisition vehicles for businesses that need and can effectively use a large capital infusion. But we have to wonder whether a privately held company that can qualify for acquisition by a SPAC couldn't also qualify for a straight-up IPO and avoid the additional layer of costs, fees and expenses inherent in the SPAC structure.