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What's a SPAC? How special purpose acquisition companies work

The company that operates Tim Hortons locations in China has announced plans to go public on the Nasdaq stock exchange, but the process is different from a typical IPO. Instead, TH International Ltd.

The company that operates Tim Hortons locations in China has announced  plans to go public on the Nasdaq stock exchange, but the process is different from a typical IPO.

Instead, TH International Ltd. (a joint venture between Restaurant Brands International and Cartesian Capital Group) plans to go public through a special purpose acquisition company, or SPAC, called Silver Crest Acquisition Group. 

SPACs have become more common over the past few years. But what is it and how does it work? Andrey Golubov, an associate professor at the University of Toronto, and Dani Lipkin, director of global business development for Toronto Stock Exchange and TSX Venture Exchange, explain some of the nuances.

How does a SPAC work, and how does it differ from an IPO?

An IPO can be an intensive process, especially in the U.S. where there are several regulatory hurdles and obligations that a company has to fulfil. Golubov points out this can often be an expensive and time-consuming ordeal.

A SPAC is an alternative way to speed up the process. Golubov said a SPAC is essentially a shell company — a company with cash, but no assets — with an experienced management team that can help a company transition into one that's traded on an exchange. It's a pile of investor cash on the hunt for an acquisition.

The shell company is already publicly traded. Once it acquires or merges with its target company, the target company effectively becomes like any other stock on an exchange, Golubov said.

The target company can bypass a lot of the regulatory constraints with this method, he said, and can avoid having to work directly with the large team of investment bankers, lawyers and auditors needed for an initial public offering. This process can also be much quicker than an IPO.

How common are SPACs?

It's fair to say that SPACs are in fashion as of late. Research company FactSet said there were 555 U.S SPACs in 2020, which were valued at more than US$193 billion altogether.

There were already 365 SPACs in the first quarter of 2021 alone, with their valuation at US$128 billion

Golubov said there is some speculation that the growth is because tight regulations have made traditional IPOs unappealing for younger companies. But he said the rise of SPACs is too new and too dramatic to know for sure yet.

Do SPACs happen in Canada?

Yes, but they're not as common as in the U.S. Lipkin says there are multiple reasons for this.

One is that the process for an IPO in Canada is a bit simpler than in the U.S., where there are more complicated regulatory constraints.

But it's also because there's another vehicle to go public without an IPO on the TSX. It's called a capital pool company (CPC).

Lipkin says a CPC operates on a smaller scale (the minimum a SPAC must raise is $30 million, while a CPC is initially capped at $10 million).

He says a CPC targets younger companies which would may not have the resources to go public. The lower valuation of a CPC also allows the company to be more nimble and pick a wider array of companies.

"If you raised $500 million (for a SPAC) you can't go and target a $100 million dollar company," said Lipkin. "Versus a CPC, when you raise a few million dollars, that doesn't limit how many companies you can go after," because a CPC can raise more cash when they decide on a company to acquire.

Similar to how SPACs are hot in the U.S., CPCs are picking up speed in Canada, with a 130 per cent increase in CPCs created in the first half of 2021 when compared to 2020.

What does the future look like for SPACs and CPCs?

Golubov says it's hard to say because SPACs and CPCs are popular due to current regulatory standards around IPOs. 

That difference in standards is also why SPACs are so popular in the U.S., while CPCs are more common in Canada.

The popularity of these types of deals largely depends on how market conditions evolve. If we see widespread changes in the regulatory procedures for becoming a publicly traded company, then Golubov said it's entirely possible that SPACs will lose their appeal.

This report by The Canadian Press was first published Aug. 16, 2021.

Salmaan Farooqui, The Canadian Press