• • Discuss the application of SPAC model in the new economy- take Virgin Galactic as an example 

  • 探討SPAC模式在新經濟中的應用情況-以維珍銀河為例

范國華／主持律師、王德浩／法務實習生

Introduction to SPACs

Special Purpose Acquisition Company (SPAC), also known as a blank check company, has become an increasingly popular method in recent years to list companies on stock exchanges. Essentially, SPAC is a shell company with no actual commercial operations; it is created solely for raising capital through an initial public offering (IPO) to acquire a private company.

In its lifespan, a SPAC undergoes three phases: an IPO phase, a target search and negotiation phase, and a closing phase.^[1] During the IPO phase, the SPAC fundraises by selling common stocks and warrants. The common stocks are often sold for $10 per unit, and the associated warrants allow the investors to purchase shares of the common stock at a fixed price in the future. Once sufficient funds are raised, they are kept in a trust.

The SPAC then moves onto the target search and negotiation phase, during which the management team, also known as the sponsors, identifies a private company of interest that it plans to acquire with the capital raised from the IPO.

In the closing phase, one of two things can happen. If the negotiations prove to be successful, the SPAC and the target company will combine into a publicly traded operating company. If not, the SPAC will have to return to the target search and negotiation phase to find another suitable candidate. If the SPAC fails to merge with or acquire a company within a deadline, typically around two years, it will be liquidated and return the funds back to the investors.

Difference between SPAC and Traditional IPO

Of the several ways that a private company can go public, one common route is through a traditional IPO. The traditional IPO starts with hiring an investment bank to oversee the process of seeking institutional investors. Roadshows and pitch meetings between company executives and potential investors are then arranged to drum up interest and demand in the company’s shares. During the IPO stage, a company comes under significant regulatory and investor scrutiny of its finances, liabilities and operations. In fact, not all IPOs have succeeded given the arduous and straining nature of the process. For example, after the revelation of the weak demand in its shares and leadership controversies, workspace sharing company WeWork withdrew its high-profile IPO in 2019.^[2]

In contrast, SPAC provides a quicker alternative for a company to go public. As SPAC has no operations, no debt, no liabilities and almost no assets to begin with, it can move through the regulatory steps in as little as 8 weeks to a few months as opposed to the many months needed for a traditional IPO process.^[3] And since SPAC does not have any historical financial results to be disclosed and inspected, a reputable management team can often avoid much investor scrutiny when making its pitch. It is then extremely convenient for a private company to merge with a SPAC to go public, because the SPAC can spare the company the costly IPO process. In addition, going public through a SPAC can keep a company’s operations private from competitors by limiting the information that the public can access.^[4]

Virgin Galactic: A Case Study on Space Industry Adoption of SPAC

Virgin Galactic, founded by the British entrepreneur Sir Richard Branson in 2004, is a space tourism company that aims to dramatically increase access to space for researchers and wealthy individuals. It develops commercial spacecraft and seeks to provide customers with suborbital flights.^[5] In October of 2019, Branson took Virgin Galactic public by merging with Social Capital Hedosophia, a SPAC founded by billionaire investor Chamath Palihapitiya and British investor Ian Osborne. Branson retained his controlling 51% stake; the investment firm obtained a 49% stake with Palihapitiya becoming the Chairman of the Board of Directors at Virgin Galactic.^[6]

Prior to founding Social Capital, Palihapitiya served as the Vice President of User Growth at Facebook and oversaw Monetization Products and Facebook Platform, both of which played vital roles in boosting Facebook’s user base to more than 750 million individuals worldwide.^[7] Osborne is the founder and Chairman of Osborne & Partners, a consulting firm that advises corporations and governments on economic regulation, public policy, commercial strategy and litigation. Osborne also served as a partner at DST Global, a family of funds with high-profile investments in Alibaba, Airbnb, Facebook, Spotify and Twitter.^[8] Their extensive investment experiences and connections allowed the new company, Virgin Galactic Holdings, Inc., to go public with a $2.3 billion market capitalization as the first space company using the SPAC route. 

At a quick glance, the merger appears to be just like any other SPAC acquisition of the time, skipping the time and cost associated with the traditional IPO. Upon closer inspection, however, one can truly appreciate the ingenuity of taking a space company public through SPAC. Commercial space travel, given our limited technological capabilities, remains to be a developing field filled with uncertainty. Innovation may require too much time or resources to be deemed profitable; accidents that raise safety concerns may shut off public confidence in and support of commercial space travel altogether. Such uncertainty can therefore dissuade prudent investors from funding space companies, because the investment returns depend largely on elusive breakthrough innovations and fluctuating public confidence in space ventures. By merging with a SPAC, Virgin Galactic avoided facing extensive investor scrutiny that may reveal damaging information or raise further concerns. In addition, since the merger was technically an acquisition, securities regulators allowed the SPAC to include projected future revenues in its investor pitches, diverting attention away from actual business results.^[9]

Given the competitive and speculative nature of the space market, a space company can benefit immensely from merging with SPAC because of the relatively quick and large sums of money it can receive. It should not come as a surprise that Virgin Galactic’s SPAC deal then set off a wave of space companies merging with SPACs. In February of 2021, satellite imagery specialist BlackSky merged with Osprey Technology Acquisition Corp, bringing in a $450 million cash infusion and valuing the company at $1.5 billion.^[10] In March of 2021, small satellite builder and data specialist Spire Global announced its merger with NavSight, bringing in $475 million cash and valuing the company at $1.6 billion.^[11] Around the end of 2021, Virgin Orbit, the satellite launching company also founded by Branson, planned to merge with NextGen Acquisition Corp. II for $483 million new capital and valued the merger at a whopping $3.2 billion.^[12] Clearly, SPAC mergers have become the preferred path to go public by space companies.

SPAC Mergers: Perfect Solution or Flawed Loophole

Despite the tremendous benefits and convenience that SPAC merger has offered to the space industry, SPAC acquisition is not a riskless scheme. First, pumping funds into a relatively small, speculative market risks creating a space industry bubble. Second, SPAC rewards certain players of the game at the cost of others. Specifically, SPAC shares’ net cash value becomes diluted after mergers. Hence, the sponsors and IPO investors profit handsomely from mergers while SPAC shareholders that choose not to redeem their shares before the merger lose out.^[13] Third, studies have shown that many SPACs have failed to meet their lofty goals and projected revenue. For example, a Financial Times study highlights that only 3 out of the 41 SPACs that have completed transactions since the start of 2020 are trading within 5 percent of their peak share prices. The rest have dropped by 50 to 80 percent from their peaks.^[14] The potential cooling down of SPAC deals, exacerbated by the increasing SEC crackdown on SPAC, shrouds the future of SPAC with uncertainty. Regardless of the changes to come, it is undeniable that SPACs have provided indispensable resources to early-stage space companies and have contributed to innovations that would forever transform human understanding of and interaction with space.