The last half of the last decade saw a surge of activity in the alternative IPO space through the use of special purpose acquisition vehicles (or SPACs). The concept is elegant in its simplicity: a SPAC is no more than a newly incorporated company that goes to IPO to raise capital to fund a strategic acquisition 18-24 months later. The SPAC IPO is accordingly referred to as a “blind capital raise” or an “IPO of a company to be named at a later date” and SPACs - new companies without assets, liabilities or operations of their own – are also known as “cash shells” or “blank cheques”. The terminology is apt, as whilst founders may have a sector in mind (often tech or energy) the appropriate target for merger or acquisition is usually only identified after the capital raise, meaning the IPO investor is effectively buying a chunk of blank canvas, and entrusting management or private equity advisors to render it into a priceless masterpiece.
The first step is identifying and securing a “business combination”: if no deal can be struck within the 18-24 month period post-IPO, then the capital raise proceeds – held on trust - are returned to investors, and the SPAC is wound up (a “liquidated SPAC”). Where an acquisition is made, success of the SPAC IPO is measured by the returns generated from IPO through to business combination (Silver Run, anyone..?). Those returns are in turn generally accepted to be reasonably predictive of post deSPAC outcome and whether the speculative investment can be considered to be successful.
Of the many factors at play here - careful IPO cycle planning, good investment strategy, securing underwriting, placing the correct insurance, fending off competition from private equity firms and other strategic buyers eyeing the same investment, and putting in place a suitable management, advisory and governance framework to ensure post-closing growth – a critical factor is whether the SPAC itself is fit for purpose.
The British Virgin Islands (BVI) has been a popular SPAC incorporation jurisdiction for the following reasons:
- The BVI has one of the most flexible corporate law regimes in the world. At Harneys, we have partnered with the legislature over our sixty-year history to develop a corporate and insolvency law regime that, coupled with light but effective regulation, delivers exactly what the market demands. By way of example, BVI companies are not required to delineate their “objects”: a BVI company may engage in any lawful activity, and this is particularly useful for SPAC investors still on the hunt for the right target. The concept of “share capital” has been abolished and replaced with a concept of “authorized shares” – and the law is extremely flexible. Companies may issue shares in any currency, with or without par value, in an unlimited amount, an unlimited number of classes and series and with share rights that can be as simple or complex as the transaction requires, share-warrant combinations that are easy to issue, with the freedom legally to grant financial assistance and the flexibility to return dividends out of any asset/income source provided the SPAC remains solvent.
- Business combination is often achieved through merger. The BVI statutory merger regime offers the flexibility to achieve merger through almost any combination of share, cash or asset transfer, exchange or issuance. BVI SPACs may merge with one or more BVI or foreign targets or any combination of the foregoing, where the relevant foreign jurisdiction so permits.
- The BVI stands proudly as the gold standard bearer in the offshore world with a common law root, strong rule of law, deep bench of experienced judges and right of final appeal to the Privy Council. The BVI has kept apace with an astonishing number of global calls for regulatory reform and has maintained white-listing on all major global stock exchanges. In terms of investor attitude, there’s familiarity with the jurisdiction which borders in some cases, notably Asia, on positive fondness.
- The BVI offers 100% tax neutrality: there is no charge to tax in the BVI payable by the SPAC in terms of corporate profits or by the investors in relation to their returns. The BVI does not levy stamp duty on the transfer of BVI shares.
- Incorporation, and indeed liquidation, of a SPAC is time and cost efficient.
- The BVI boasts a robust financial services industry, well-served by seasoned lawyers, tax advisors and corporate service providers that are familiar with the market and have substantially sizeable operations to support the most challenging of transactions. All aspect of incorporation, IPO, business combination and post deSPAC support can be handled by our team of experts.
Harneys is here to help. Please contact Ellie Crespi for further information or your usual Harneys contact.