The acronym SPAC is showing up more and more in relation to the cannabis industry. SPAC IPOs raised, on average, $231 million in 2019 and $312 million thus far in 2020. SPACs are accountable for more than $2.5 billion raised in the cannabis industry.
The number and size of SPAC IPOs have steadily and consistently been increasing since 2016. And, for cannabis entrepreneurs facing financial trouble during the pandemic, the uptick in SPAC activity is a promising development. Here’s what cannabis operators need to know about the growing presence of SPAC vehicles.
What is SPAC?
SPAC stands for Special Purpose Acquisition Company. SPACs are sometimes called blank-check companies. The company has no established business plan and is used solely to merge with or acquire another business entity. An SPAC is publicly listed and raises funds through an IPO, later using those funds to acquire a new company.
As reported by Investopedia, blank check companies are considered penny stocks or microcap stocks by the SEC. As such, these companies must abide by specific SEC rules and regulations. SPACs make up about 20% of the U.S. IPO market as of 2019.
How do SPACs raise money?
At the start, before the SPAC forms, entrepreneurs and investors agree on a general plan of what they want to buy. Importantly, a blank check company does not list what it is going to buy. You can infer what type of company it will likely acquire based on the skill sets and expertise of the founding partners.
Then, the SPAC will raise money through an IPO. The SPAC pools money from investors – known as a blind pool – into the public company. The money is typically placed in an interest-bearing trust and collects interest. Once public, the SPAC can go out and make acquisitions or investments based on a strategy defined by the company's managers. The SPAC finds a company it wishes to acquire and brings the deal to the people who invested in the SPAC.
Shareholders can vote to approve the deal if they want to invest in it. If they don’t like the investment option, shareholders can use what's called the redemption right and ask for their money back. SPACs usually have up to two years to make an investment.
There are plenty of infamous examples of SPAC acquisitions outside the cannabis industry. IPOs by DraftKings, Virgin Galactic, and Nikola Motor were all achieved through the use of the SPAC vehicle.
SPACs have become more and more common as a way to invest in cannabis companies. They are an appealing alternative to venture capital or private-equity investors, who tend to shy away from investing in this industry while cannabis remains illegal at the federal level.
There are a few big names dominating the cannabis SPAC market. Two major groups, Collective Growth (CGROU) and Greenrose Acquisition (GNRSU), have raised $150 million each. “That's more than all of the cannabis/hemp IPO activity in 2018 and 2019 combined,” reported The Street. Other big players include:
- Stable Road Acquisition Corp: IPO of $172.5 million
- Merida Merger Corp: IPO of $120 million
- Silver Spike Acquisition Corp.: IPO of $250 million
- Ceres Acquisition Corp: IPO of $120 million
For a privately-held cannabis company, going public using a SPAC is a good way to raise lots of capital into a stable company without starting from square one.
What are the limitations and risks of SPAC?
The SPAC has constraints that don’t exist with other investment vehicles. The SPAC has to spend 80% of its funds on one transaction. And, as, one financial expert at Tuscan Holdings noted, “You have three months to get the deal done. You need two years of audited financials and corporate governance with independent board members. That's a hard bar to jump for many cannabis companies."
SPACs are not permitted to buy federally-illegal businesses in the US when they are listed on the NYSE or Nasdaq – even if the business is legal at the state level. That means, in practice, that this method for going public privileges non-licensed ancillary cannabis businesses and US hemp businesses that are legal on the national level. Cannabis companies operating solely in California may not be eligible for acquisition and public listing via SPAC.
Should you consider an SPAC?
As The Street reports, many cannabis SPACs are raising huge sums of money, but the pool of companies eligible for acquisition is limited. You may be able to sell your private company for more than fair market price if you fit the right profile.
As with any acquisition or merger, the option of selling can often mean the founder or managing partners get ousted, and employees are laid off. SPACs are a good way to raise funding and stay in control of your cannabis operation, providing you find the right group of investors.
If you’re interested in going public through this vehicle, speak to one of our experts to learn more or call us at 800-674-9050.