So you have been asked to become the director of a special-purpose acquisition company commonly known as SPAC. The job has something to do with the director of a company. But there is one big difference: instead of overseeing a company that builds, sells, or creates something, you are responsible for a large pot of money.
Sure, being asked to become director of a SPAC is a coveted brass ring in certain circles. In return, you will be asked to contribute knowledge and capital to the SPAC, the sole purpose of which is to find a company that wants to go public within two years. At this point, you are most likely no longer a director.
If everything works out, you can make a lot of money. But there are also risks – the biggest one is not finding a good quality company in time to merge with your SPAC.
So what should you do when asked to be director of one of these units? The first is knowing who else is on the board and making sure you understand SPAC’s mission, according to a report from asset management firm Cresset.
Next, the report says, make sure the SPAC offers liability insurance for its directors as not all SPACs will be successful. Being a director of a public company is a serious responsibility that involves a fiduciary responsibility to investors and a duty to make decisions in the best interests of those shareholders.
And there is always a risk to your reputation: you will remain a brilliant business leader if the SPAC is successful, but all of your previous glory could be tarnished by a failed SPAC.
“My parents always said you were the person you connected with,” said Jack Sawyer, general manager of Navigation Capital Partners, who specialize in SPACs. “I think there are too many people in SPACs right now, and we’ll see a lot of them don’t do business.”
He added, “There are celebrities who give their names to SPACs when they don’t even know what the deal is about.”
A SPAC exists solely to acquire a single, mature company and make it a public company through a reverse merger, since the SPAC is already public. As a director, your job is not to keep an eye on the company’s management team. The point is to find a company with an already solid management team that is ready to get started. Once the reverse merger is done, the SPAC will be dissolved and the work of many of its directors will be done – albeit with what will hopefully be a substantial payoff for their work.
Until then, the SPAC itself must ensure that it does not contravene the requirements of the Securities and Exchange Commission. And for directors, this requires a different mindset.
For one, the competition between SPACs to acquire a company is fierce. Almost 300 SPACs have been created and published so far this year, more than the 248 listings in all of last year and up from 59 in 2019. The craze for SPACs has been talked about, but they remain a path for the rich looking to make returns , can’t get them anywhere else.
The increase in companies going public through SPACs was originally due to the inability of companies to travel for the traditional roadshow that came with an IPO during the pandemic. The number of SPACs has continued to grow as they offer mature companies the ability to go public without the traditional IPO filings (although the process of being acquired by a SPAC is certainly not without paperwork and legal assistance).
With the proliferation of SPACs, the SEC has tightened rules, particularly those relating to the projections the SPACs make about their progress in merging with a company and how certain classes of shares in the SPAC will be treated for accounting purposes. These stricter rules are good for some SPACs and their directors and not so good for others.
“The SEC is getting a little nervous,” said Jennifer Ceran, who served on the board of directors of Plum Acquisition, a SPAC focused on finding a technology company, and was previously CFO of Smartsheet and Coupons.com, two technology companies it owns was helped take the public. “Your forecasts must be based on solid data. As an operator, I have spent my career making forecasts and reports to our company over several years. “
Directors of a SPAC will not join an existing public company or private company that intends to go public. You join a company with ideas, aspirations, and money – but no cash flow.
Directors are expected to use their own industry knowledge and connections to find a company to merge with. “One of the most important elements of being a director is not just industry experience, but really good networks,” said Ms. Ceran. “You want the management team and board of directors to have connections. You need to have people in your SPAC who have been company operators and not just transaction people. “
Vin Murria, a London-based tech entrepreneur who took three companies public as part of the traditional listing process, said several SPACs reached out to them because they wanted to leverage their knowledge of the European market.
“I can make a great introduction to European technology,” said Ms. Murria. “I know pretty much everyone positively.”
Simply put, the directors of a SPAC are expected to be a dream team. Their expertise comes from related but different industries and aims to help find the company, advertise the founders and bring it to the public in a reverse merger. Think of the movie “Ocean’s Eleven,” in which everyone brought a different skill set to ward off the raid.
Directors generally belong to the group that raises venture capital. This is the money that will help the SPAC fund its search for a company to be listed on the stock exchange. In return, they receive a share allocation before the SPAC itself goes public. When participating in SPAC, directors are also remunerated instead of traditional directors’ payments.
In theory at least, the SPAC will identify a company that is supposed to buy and bring in additional capital from the so-called PIPE market – or a private investment in public equity. The company then takes over the listing and the SPAC disappears.
But how many SPACs will not find a company to acquire in the required two years, and what impact does this have on directors who meet the standards of a director of a public company?
Since a director on a SPAC board of directors is a temporary position, knowing who your partners will be is even more important, said Louise Sams, retired executive vice president and general counsel of Turner Broadcasting System. She sits on the boards of two listed companies as well as D&Z Media Acquisition, a SPAC.
“You have to think about the management team,” she said. “Which law firm do you use? Which investment bank do you use? What is your level of comfort with all of these people? As long as your level of comfort is high, you should participate. “
Ms. Sams said it was important for her to know that the other directors came with knowledge and connections that could help the SPAC find a company. “You need to know what you are putting on the table,” she said.
Because once you get to the table, finding a company and completing your mission is a sprint.