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Why are SPACs so Popular? Shay Benhamou Sheds Light on their Advantages

In the last decade, there has been a dramatic increase in the use of special purpose acquisition companies (SPACs) as a suitable method for taking companies public. There are critics that may talk about the risks associated with SPACs, but then again, every investment comes with risks. According to Shay Benhamou, there are a number of cases where the advantages offered by SPACs often outweigh the risks. Furthermore, the features associated with these types of investment vehicles give target firms and investors opportunities in reverse merger transactions that are far greater than those associated with traditional reverse mergers.

If you are planning on using a SPAC, then you should bear in mind how to avoid being a penny stock. As per Shay Benhamou, this means that you will need to raise at least $5,000,000 after all fees and expenses, which include those that are paid to the promoters. Likewise, you also need to prove a trading price of more than $5, which requires an underwritten offering in almost all cases. If you are wondering what benefits a SPAC can offer, to the investor and to the target, Shay Benhamou has shed some light on them below:

Advantages for Investors

One of the first benefits that SPACs offer to investors is that the funds raised are kept in escrow. The entire lump sum is immediately placed into escrow and earns a small amount of interest while awaiting a merger. According to Shay Benhamou, this can significantly reduce the downside risks. What’s the worst that could happen? A deal would never be made, which means the investor will not be able to make the 5% or 10% return they were expecting and only receive a couple of points above zero. Nonetheless, there is an upside possibility if they find a good merger candidate and the risks seem worth it because the downside remains protected.

Another perk that investors in SPAC enjoy is that they have the option of trading both their warrants and stocks during as well as after the interim stage, while they are awaiting a reliable target company to merge in. As per Shay Benhamou, the stock does dip a bit in a reverse merger deal and this is primarily because the expenses incurred in setting up a SPAC put some strain on the resources of the shell. But, between the time a SPAC is created and any time after, an investor has the option of selling their stock.

After the announcement of the deal, the stock typically goes back to the value before the merger announcement. In fact, Shay Benhamou states that investors can sell their shares and avoid the loss of having to sell them at cost and then hold the warrants. In the event that they make a good deal, this could still give some good returns, resulting in a win-win situation. One of the best things about SPACs is that they come with a time limitation. The SPAC team has to find a target within two years and even though there is still illiquidity and lock-up until the merger happens, but it is limited.

Most importantly, if the deal doesn’t happen between the investors and management, then the initial funds are returned. In a venture capital, people come in and invest their money in a ‘blind pool’ that’s used for investment by the VC fund management team. But, Shay Benhamou highlights that a SPAC is different because it provides investors with the option of having greater input in the investment themselves. Sure, the investors don’t choose the deals, but they have the option of opting out of any target opportunity and getting their funds back.

Furthermore, investors also have the ability of voting on any opportunity that’s identified as a target in a reverse merger transaction. Thus, Shay Benhamou states that the best advantage that an investor can get in a SPAC deal is the ability of saying yes or no in an investment decision, a feature that’s very different from the blind pools involved in venture capitals.

Advantages for Targets

Going for a SPAC rather than a traditional reverse merger, a traditional IPO or self-filing, needs an in-depth understanding into the benefits a SPAC can offer to a target company. It is a well-known fact that reverse mergers are always faster and cheaper than IPOs and Shay Benhamou says that SPACs offer even more benefits than a traditional reverse merger. In a standard SPAC transaction, underwriters have already raised the money, which means negotiations with them are mostly unnecessary.

Timing is of the utmost importance in a traditional IPO and missing the correct ‘window’ can make the difference between a failed and successful IPO. As per Shay Benhamou, this worry is eliminated where a SPAC is concerned because this market is always active. In fact, it can be more so, particularly after the IPO window is closed due to macro shocks or financial instability. There is no worry about failing to raise the capital via institutional investors, or changing the price of an offering because all of this is done when the SPAC has raised the money and placed for holding.

When a SPAC merger happens, the management team often retains at least one key individual for an active role in the company or as a key consultant on the board. Shay Benhamou says that this is helpful in mitigating the risk of the company not meeting investors’ objectives after the deal is consummated. In addition, there are a lot of smaller companies that don’t qualify for an IPO traditionally, which means a SPAC is a good option for those that don’t make the cut, but still have substantial growth potential aspects. Lastly, SPACs also have a significant amount of cash and even if it is less than $5 million, it is enough to result in immediate capital appreciation as well as value for the target company that’s involved in the transaction.

Thus, SPAC allows target companies to enjoy the benefits of self-filing without having to go through a capital-raising event.

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