January 3, 2020
De-SPAC Process – Meeting Minimum Listing Conditions
The combined company from a De-SPAC transaction has to meet US stock exchanges’ listing conditions, including the minimum market capitalization, the market value of public float, the stockholder’s equity, and number of round shareholders.
In this second of the series of three posts on the De-SPACing process, let’s look at the some of the mechanisms that can be considered to achieving the US stock exchanges’ minimum listing conditions.
Tender Offer for Rights
If the SPAC units contains Rights, the SPAC sponsor can enter into a tender offer for the rights to remove the dilution created by the rights before the combination with the target. As an example, in the case of GigCapital, Inc. (NYSE: GIG), where each unit includes one Right for 1/10 of a share, the tender offer was made to purchase the Rights, at a purchase price of $0.99 per Right.
Forward Purchase Agreements for Rights Backstop
If the Rights are heavily sold in the market in the first few days of trading, the stock price will be much lower than the redemption stock price. To prevent this, the SPAC entity can enter into forward purchasing agreements to backstop the rights. In the case of GigCapital, Inc., non-binding LOIs with partners for the Rights were established ahead of the combination date.
Forward Purchase Agreement for Shares Backstop
In a number of recent SPAC IPOs, affiliates of the sponsor or institutional investors have entered into a forward purchase agreement with the SPAC, committing to purchase equity (stock or units) in connection with the De-SPAC transaction to the extent the additional fund is necessary to complete the transaction. In cases where the forward purchase commitment comes from a private equity fund or other investor with a limited investment mandate, it may be appropriate to condition the obligation of the investor on the De-SPAC transaction satisfying the investment mandate of the investor.
In the case of GigCapital, Inc., Nomura purchased shares to prevent redemption. Prior to the closing of GigCapital’s business combination, Nomura agreed not to redeem any of those shares at the vote, effectively backstopping the trust.
The mechanisms discussed above, far from being exhaustive, illustrate the flexibility of SPAC/PPETM De-SPAC process in helping the combined company to meeting the minimum requirements for listing on the NYSE and NASDAQ.