SPACs and what they mean for Indian Startups & Investors?

Diving deeper into the latest Silicon Valley trend - SPACs.

Overview

Special Purpose Acquisition Company (SPACs) are back in style (yes, they’ve been around for decades) thanks to the ‘King of SPACs’ Chamath Pahilapitiya who recently used one to take Virgin Galactic public. Now most late stage investors in tech have one (according to one report 60 of the 95 IPOs in the US took the SPAC route in 2020, and have raised over $24Billion USD already!). Arguably 2020-30 will be the decade of SPACs OR it could all go horribly wrong and SPACs could end up with the reputation of ICOs. 

Here’s what you need to know:

• A SPAC is a shell company that raises money by going public via an IPO, with the goal of merging with a private company within 18-24 months as a way of taking the private company public (without an IPO). The SPAC raises money from public market investors which is then part of the merged entity. 

• 3 Key Stakeholders involved in a SPAC: Owners (typically a fund or institutional investor, typically gets 20-25% equity of the SPAC and is called a ‘sponsor’), Operators (a CEO + Board of Directors) & Investors (public market investors).

• SPACs can be set up in a few months VS a traditional IPO that is much more complex (an expensive process, equity dilution, loss of management control, and the possibility of increased liability etc).

• SPACs tend to work best for companies which already have a market cap of more than $500million.

• As a SPAC investor, usually you can get your capital back if you do not approve of the company that the SPAC has finalised to merge with.

• Additionally, a SPAC aside from raising from public investors, can also raise more money from private investors through an instrument called PIPE (Private Investment in Public Equity). 

What does it mean for Indian Startups?

There are several examples of India focussed SPAC entities such as Trans-India Acquisition, Constellation Alpha Capital, Phoenix India Acquisition, etc so the concept of SPACs is not new for Indian companies. In fact, in 2016 Yatra got listed on NASDAQ by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition as well. 

Apart from regulatory approvals and compliance such as with Merger Regulations, FEMA ODI regulations, Companies Act, NCLT approval (if interested read more in this article), getting an RBI approval would require that the value of securities held by any resident individuals in India to be under the $250,000/year limit the Liberalized Remittance Scheme (“LRS”) - this is the same cap that individuals (i.e Indian residents) have to follow when investing internationally. Alternatively, there is also an option of a share swap between SPAC and the shareholders of the Indian target, such that the Indian target becomes a wholly-owned subsidiary of the SPAC and the Indian target shareholders hold majority units in the SPAC. 

So in short, it is complex but possible for Indian Startups to start leveraging this route like other companies in the past but I feel most late-stage investors in India will give it at least 12-18 months to see how this wave plays out in the US before taking the plunge & truth be told there are still only handful companies with a valuation of <$500Million at which the SPACs’ route makes sense. Will it be like the dot com/ICO bubble or is the trend here to stay? Share your thoughts in the comments section below! And as far as wishful thinking goes, one can only hope that by then it’ll become simpler for Indian Startups to list in India and create wealth VS causing a ‘brain + company + equity’ drain to international exchanges. 

As they say, ‘let the good times roll’.