Some SPACs Have Spare Cash

We talked on Wednesday about an unusual situation at a couple of special purpose acquisition companies. Basically a SPAC raises money by selling stock to public shareholders at $10 per share, puts the money in a trust account, and then either (1) uses the money to merge with a private company, taking it public and giving the public shareholders shares in that newly public target company, or (2) fails to do a merger within two years and gives the shareholders their $10 back with interest. The sponsor of the SPAC generally pays the expenses of starting the SPAC and looking for a deal; if she finds a deal she is richly rewarded (with 20% of the SPAC’s shares), but if she doesn’t she eats those costs. The trust account can’t be touched to pay those costs; it is there to be used only if the SPAC finds a deal.

What we talked about Wednesday was the edge case in which a SPAC does not do a deal and somehow incurs expenses that the sponsor does not pay. In that case, it seems that the SPAC can ask the public shareholders to hand back some of the money that they got: The company really had to pay that money to its vendors before it paid the shareholders, and so the shareholders seem to be technically liable for paying it back. Or so the SPACs say anyway. In practice the numbers involved are small — $0.02 or $0.11 per share — and it seems unlikely that the SPACs will pursue every retail shareholder to the ends of the earth for, like, $11 each. Also, I mean, the sponsor really should bear these expenses. But, right, technically, if you invest in a SPAC and it somehow ends up with (1) no deal, (2) your $10 per share plus interest in a trust account, and (3) a negative amount of money in its other accounts, then I guess you could have to make up the difference.1