Expiration Dates Pose a Hurdle for SPACs Yet to Finalize Mergers

November 10, 2023

Special Purpose Acquisition Companies (SPACs) are publicly traded corporations with a specific goal—facilitating a merger with a private business to take it public. They have a two-year lifespan and raise funds from public-equity investors. This process aims to streamline and de-risk the initial public offering journey for the target companies.

As of February 2023, 348 SPACs were nearing expiration, and in March, 92 SPACs with over $26 billion in trust accounts were obligated to complete mergers. This pressure has led to a notable increase in liquidations, with 32% of the 860 SPACs issued from 2020 to 2022 meeting this fate, twice the historical levels.

In the past, the announcement of a target company was a strong signal, but recent trends show a higher rate of deal failures post-announcement. SPACs are grappling with various challenges, including a more stringent regulatory environment, a declining stock market, and rising interest rates. The third quarter of the year witnessed 36 SPAC merger announcements and 21 completions, with a decrease compared to previous quarters.

The Securities Exchange Commission has proposed stricter rules, particularly regarding forward-looking statements and accounting disclosures. This regulatory uncertainty has led to a significant decrease in new SPAC IPOs in 2022. Notably, SPACs are increasingly seeking overseas merger targets, viewing them as more accessible than dwindling and more restrictive domestic options.

Over the past two months, companies like Wanshun Technology Industrial Group Ltd. from China, Toyo Solar from Vietnam, Nuvo Group Ltd. from Israel, and FC Barcelona’s Barca Media from Spain have opted to merge with U.S. SPACs. The expiration date poses a significant challenge for SPACs, and a scarcity of private financing options has reduced cash available for SPAC targets, making this path less attractive to domestic companies.

It is essential to note that SPAC backers face a strong incentive to secure mergers as they receive shares in the target company’s equity upon deal completion—compensation they risk losing if a target isn’t found. Consequently, the SPAC market is increasingly turning towards overseas targets to navigate these challenges.

Observers will be carefully watching how international targets perform as domestic companies validate their choice to merge with a SPAC.

For more information on how a SPAC merger could influence your business, contact the qualified attorneys at Rock, Fusco & Connelly, LLC