Jonathan M. Nathan, Partner at Meitar Law Offices.  <span style="font-weight: normal;">(Credit: Tomer Jacobson)</span>

SPAC is back: Surprising new opportunities

"Despite all of the negative talk, democratization of the U.S. capital markets that can be facilitated by the SPAC wave, continues, thus allowing smaller Israeli tech companies to go public," writes Jonathan M. Nathan of Meitar Law Offices

Almost exactly one year ago, an article that I authored appearing in this publication celebrated the SPAC phenomenon and how it was having a systemic impact on the eco-system of Israeli companies that look to go public in the U.S. capital markets.
Surely, you say, 2022 has brought us back to cold, hard reality and disillusionment has set in. Certainly, we would be foolish to ignore the great market “correction” in 2022, the loss of over 60% of the aggregate market capitalization of many Israeli former unicorns that went public in 2021 via de-SPACs, and the near disappearance of SPAC IPOs in the U.S. markets in 2022. Why should we still believe in something that is being heavily scrutinized by the SEC (U.S. Securities and Exchange Commission), with some of the large U.S. investment banks pulling out of the market? Aren’t we realists?
Yes, the big party was somewhat short-lived and the sky-high valuations given to the Israeli and other hi-tech companies in their IPOs have come crashing down to Earth in the after-market. But one thing should be crystal-clear to everyone:
Just like the SPAC wave “piggy–backed” onto the trillions of dollars of stimulus monies pumped into the U.S. capital markets by consecutive U.S. administrations, and was a by-product, rather than a catalyst of an “up” market in 2021, the disappointing market performance of the companies that went public via de-SPACs is a by-product— not a cause— of a down market.
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יונתן נתן מיתר עורכי דין
יונתן נתן מיתר עורכי דין
Jonathan M. Nathan, Partner at Meitar Law Offices. (Credit: Tomer Jacobson)
And, the good news is that while we should not expect too many new SPACs to be formed and taken public in the near future, the SPAC market—or more particularly, the de-SPAC market— continues to operate with a select group of target companies – those with moderately growing revenues and profitability and/or extraordinary high rates of growth, with visibility towards profitability in the near-to-medium term based on favorable unit economics.
The fundamental premise that I put forth last year did not concern the “high flying” tech unicorns with sky-high valuations that went public in 2021 via de-SPACs. Those top-level companies will remain in the capital markets, whether the market is an “up” mode (i.e., 2021) or “down” mode (i.e., 2022). They will have their ups and downs but will perform fine in the long run, so long as their business model and technology stand the test of time.
Instead, the “gist” of what I posited last year was that SPACs served as an ideal landing ground for mid-size Israeli companies— companies with promising technology and growing revenues in the approximate $50 - $150 million range. The SPAC wave opened the possibility of a U.S. listing for those types of companies, through the model of the back-end, de-SPAC business combination. The SPAC wave presented those mid-size Israeli companies with an alternative path to enter the U.S. public markets, something that is not available to them through a traditional IPO on the U.S. markets, for which they are too small to interest the bulge bracket underwriters, as well as an alternative to other, less sophisticated public markets outside of the U.S.
As luck (or fate) would have it, given the down market, and the omnipresence of SPACs competing to “beat the buzzer” and enter into business combination transactions prior to their built-in expiration date, there are good “deals” to be had. If a SPAC does not succeed at finding a target company before the limited-time anniversary of its IPO (including any extensions), it dissolves. In that scenario, the sponsor’s interest in the SPAC becomes worthless, and all of the time, money and effort that its sponsor and affiliates expended goes to waste.
In light of that reality, we are witnessing a reversion to the kinds of deals for which the concept of a SPAC was originally created– mid-sized businesses looking for access to the U.S. public markets in order to advance their brand and business reputation and in order to access many more financing alternatives to support their businesses. On top of that, as valuations come down in the private markets as well, the return to less aggressive valuations can serve as an opportunity for a private company to come into the public market at a level that will allow investors– including new public investors– to benefit from an appreciation in value of the stock.

Yes, indeed, the complementary PIPE financing that has typically been committed to at the same time that the business combination agreement is signed has become difficult to obtain, especially given the market volatility– both currently, and as expected over the course of the next few months. Instead of equity PIPEs, there is interest in the market for structured convertible debt financings for the new public company. While the redemption rates have been high relative to over a year ago, there are clearly some more properly priced deals that are able to cut the redemption rate down significantly, which in turn can provide enough publicly traded shareholders’ equity to meet the listing criteria for Nasdaq or NYSE and to thereby enable the closing of deals.
While the de-SPAC process is not a sure bet for a mid-size private company, the cooperation created with a solid SPAC team through the business combination process can lead to some remarkable results in growth and branding— often much sooner than waiting for the IPO market to open up or going through another round of private equity financing. Do not expect any bloated valuations anymore, but that is actually a good thing, as it sets expectations at the appropriate level from the outset for the new public company’s life as a traded company, without all of the negative consequences of sharp decreases in valuations and deflation of the expectations of investors and employees.
In conclusion, the “democratization” of the U.S. capital markets that can be facilitated by the SPAC wave—allowing smaller Israeli tech companies to go public— continues, despite all of the negative talk. And, that should be good news for the smaller sized tech companies from the land flowing with “milk, honey and technology”.
The author is a partner at Meitar Law Offices in Ramat Gan, Israel.