Some may have been at the beach in July when NYSE’s filing regarding SPAC listings got approved by the SEC. The enhanced ruling means that NYSE is opening its doors to listings of early-stage companies and SPACs!
There is no hype right now around SPACs. They are nowhere close to being the poor and distant relative of ICOs; in terms of branding. They are not new structures. But they are on the rise thanks to NYSE’s and Nasdaq’s eagerness to find new streams of revenues. A mini-boom is going on and is more or less unnoticed and shadowed by political macro risks and ICO related events.
What is a SPAC?
The acronym SPAC is “Special purpose acquisition companies”. For some of us who were Star Trek fans early on, it does resonate but I can assure you that the structurer of this “special vehicle” is not Spock.
A SPAC goes public and raises money that is kept in a trust. The mandate of the SPAC is to go out hunting to acquire a private operating company (or companies) in a specific sector. It used to be a tech unicorn hunt in the old days. The success of SPAC listings a decade ago didn’t actually become a hit. It was an expensive process that partially made it faster to list for private companies of a certain size (typically above $200mil valuation) and the returns were not that spectacular. In many cases, the SPACs never completed an acquisition and liquidated. Data from listings since 2003 in the US shows that 55% of SPACs completed acquisitions. In the rest of the case, either the targets were not identified or the merger/acquisition was not approved. In which case, 95% of the invested funds were returned upon liquidation (another haircut).
The management team of the SPAC upon listing has a period of time, usually 24 months, in which to identify a private company acquisition target and complete the acquisition. If such a deal is made, management of the SPAC profits by owning 20% of the common stock acquired from the shares of the founder and any other shareholder and receiving an equity interest in the new company. This is a large “haircut” that hasn’t changed.
The key part of NYSE’s recent SEC filing was about modernizing the listing rule requirements for SPACs, revising the fee structure and developing new distribution standards for SPACs upon listing.
As competition between exchanges for the listing business is not a gentlemen’s game, Nasdaq also recently filed for a SEC approval to allow for new rules for SPAC listings on their platform.
SPAC listings – facts and figures
SPAC structures have a long history dating back to the early ‘90s, when the SEC issued Rule 419 to govern these blind pools of money as listed acquisition vehicles. SPAC listings hit a peak in 2007, with a total of 66 SPACs which at the time accounted for more than a fifth of all IPOs!
For 2017 the WSJ reports that 22 SPACs (18 of these listings were in NASDAQ) have floated IPOs so far, raising nearly $7bil. This is double the size from 2016 and 7 times more than 2010 (Source).
A great example of a SPAC listing of a large size is Social Capital Hedosophia Holdings Corp. listed on NYSE in September IPOA.U) and sold $600 million worth of shares to the public so that it can go out and hunt for a private tech unicorn to take public. This SPAC is a collaboration of a US and a UK VC (Social Capital in SanFran & Hedosophia in London). They want to address the fact that as of May 2017, there were about 150 private tech startups valued at over $1 billion, compared with about 200 public technology companies with a market cap of $1 billion. One of the reasons being that there is so much private money around that many companies stay private. Chamath Palihapitiya, the founder of the venture-capital firm Social Capital, is setting himself up to become the Warren Buffett of tech investing. (Source)
According to CB insights unicorn listings in Fintech, we have 25 listings currently and about half of them are close to the $1billion cut-off that could make them great SPAC candidates.
Company Valuation Unicorn status
|One97 Communications (operates Paytm)||$5.7||5/12/2015||India|
|Social Finance||$4||2/3/2015||United States|
|Credit Karma||$3.5||9/29/2014||United States|
|Funding Circle||$1||4/23/2015||United Kingdom|
|Symphony Communication Services Holdings||$1||5/16/2017||United States|
I also believe that lending and crowdfunding platforms are great candidates that we may see “wrapped” into a SPAC in the next months rather than taken over from a private equity firm. Think of the recent announcement of Prosper raising $50mil of capital – what an injection for treating the trauma of losing its unicorn status! Its valuation has plummeted over 70%!
The only pure Fintech SPACs are listed on Nasdaq, FNTC and FNTEU. They are both was a managed by The Bancorp (TBBK) and aim to acquire a financial technology business,
First FinTech Acquisition Corp. (NASDAQ: FNTC) which listed on Feb 2015 and raised $100mil. On March 2016 it acquired CardConnect, a decade-old private payment processing firm with 60,000 merchants on its platform and over $17 billion in credit card transactions processed to date. The acquisition was based on a valuation of $350 million in cash ($180mil) and stock ($170mil).
FinTech Acquisition II (FNTEU) was listed in Jan 2017 again to acquire a financial technology business and raised $153 million by offering 15.3 million shares at $10, up from the 13.5 million shares originally filed. Currently trading close to $10.50 and hunting for a target.
Bancorp is a small cap dedicated Fintech player in many different ways. Not only have they partnered with Fintech startups but also have invested in two innovation labs! Last year Bancorp partnered with Varo Money, the mobile-only banking app, in which The Bancorp Bank will be providing private-label banking services for Varo’s mobile checking and savings accounts. Just last December it launched Bancorp Cube8, a division to “explore unconventional–even radical–ideas in financial technologies”. The initial focus will be on digital lending, digital payments, mobile payments, and blockchain. Cube8 also will explore ways to improve efficiencies in AML/Bank Secrecy Act sphere, big data and artificial intelligence.
Who else will join Bancorp in listing Fintech SPACs? Maybe Visa or Mastercard? Are some fintech sub-verticals natural acquisition targets for Fintech SPACs? “It makes sense,” says Ellenoff (from a law firm specializing in SPAC structures) “I could see over the next six months or so a SPAC buying a crowdfunding platform.” Source Is fintech the next hot SPAC market?
Wallets are too early, crowdfunding, lending, and payment solutions are riper. But all the Fintechs whose unicorn status is vulnerable (just close to the $1bil) and are B2C plays are also yummy SPAC prospects.
Efi Pylarinou is a Fintech thought-leader, consultant and investor.
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