Currently in IPO markets, the boom in biotech SPACs is one of the biggest stories. Until recently, Special Purpose Acquisition Companies or SPACs, operated on the borders of the financial industry. However, in 2020, their popularity exploded and this resulted in a 320 percent surge in the quantity of SPAC IPOs in comparison with 2019.
A SPAC is basically a blank check company. It functions when a SPAC sponsor group creates a unit to raise capital within the public markets. This is done by selling units to investors, which is made up of a common share in addition to some percentage of a warrant. The units usually sell for $10 each and this money is then put into a trust account.
This account is essentially a credit instrument that sits in anticipation of the announcement of a deal. When the announcement is made, investors are given the power to redeem their shares in exchange for a pro rata part of the trust and cash when a deal closes, if they do not believe it is right for them.
Benefits of SPACs vs IPOs
SPACs offer other distinct benefits and is technically a merger; this involves public SPAC entities acquiring private companies. When this it done, an S-4 is filed and this is different from an S-1. With the S-4, you have the ability to include forward-looking predictions that the SPAC sponsor group and management team can convey to public investors.
That is distinct from a regular-way IPO development, in which an S-1 is filed by the management team and this basically has historical-looking financial data. In addition, they can offer predictions; however, this offer is only made to members of the research analyst community.
After which, the community states their own projections and opinions to public investors. As such, the ability to market your own predictions is one important distinction, especially where biotech companies are concerned.
Another distinction is the point at which valuation certainty is received. With a regular-way IPO, the valuation will not be known until after the process of book building. Where SPAC transactions are considered, valuation certainty comes a lot earlier in the development. This is done by negotiating with a SPAC sponsor and getting a market check of the valuation when the private investment in public equity is raised.
Yet another distinction is the way in which a SPAC sponsor group can offer a halo effect or further market credibility because of the reputation they have developed in the biotech space. They could have operational capacity to assist the private company in accelerating its growth.
A Landscape Shift
Within the landscape of SPACs and across different industries, the PIPE or private investment in public equity development has become more crucial. The SPAC merger is subject to the approval of the shareholder and as such, shareholders have the option to redeem their shares. This is basically the amount of capital that the operating company can access and it is subject to a reasonable amount of variability.