In recent years, there has been a substantial increase in the number of companies that go public through a merger with a special purpose acquisition company (“SPAC”). A SPAC is also known as a blank check company and exists only to merge with another company. In a SPAC transaction, the private company becomes publicly traded by merging with the publicly listed SPAC. The SportsTech sector has some notable companies that went the SPAC transaction route including DraftKings, Rush Street, and Genius Sports.
- DraftKings – $3.3 billion deal closed in April 2020
- Rush Street (Playsugarhouse.com) – $1.8 billion deal closed in December 2020
- Genius Sports – $1.5 billion deal closed in April 2021
In 2021, there were a total of 613 SPAC IPOs which exceeded the previous year total of 248 by 147%. This accounted for gross proceeds of $162.4 billion in 2021. The Technology industry led the way with 84 SPAC IPOs and 61 completed merger transactions in 2021. One of the main reasons companies go public through a SPAC is to raise capital with ambitions of expanding.
Benefits and Risks of a SPAC
SPACs offer considerable benefits for companies that are planning to become publicly traded. Some of the key benefits are:
- Faster path to becoming public
- Less expensive than going public – no underwriting expenses for the private target company
- Investors interested in high growth companies
- Possibility of raising additional capital through debt or PIPE (private investment in public equity) funding
There are also risks to consider when it comes to SPACs:
- Dilution risk – PIPE funding could dilute existing stake and the potential exercise of SPAC warrants
- Greater regulation – The Securities and Exchange Commission (“SEC”) announced new deal scrutiny in 2021 for SPACs which increase the oversight of deal structures and disclosures
- Volatility in share price – shares of SPACs have been volatile in 2021 based on the unpredictable performance of new companies
How to Make Your Company More Valuable and More Attractive to SPAC Mergers?
To make your SportsTech company more valuable and more attractive to potential SPAC mergers the most important advice is to begin operating as a public company. This includes:
- Governance/tone at the top – forming an independent board of directors and an audit committee to direct, manage and monitor the activities of the company toward achieving its objectives. Having a board of directors with public experience can be strategic in holding the CEO accountable and guiding the company to operate as a public company.
- Building infrastructure around processes – hiring additional employee resources to have an IT environment, segregation of duties, and internal controls in place around all financial processes. Investing in these resources early can help make the company more efficient as the company grows and thus more profitable.
- Creating financial forecasting models – forming a process around business planning, budgeting, and operations management to estimate future earnings, cash flows for analysts as well as assist with business decisions around purchasing, hiring, investing, etc. Financial models are essential for the dynamics of the business and will guide the company with financial data on critical decision-making.
- Hiring SEC counsel – law firms that specialize in SEC compliance will know exactly what private target companies must provide for the SPAC’s regulatory SEC filings. They can assist with preparing for a SPAC transaction, preparing annual reports, preparing for annual proxy meetings, and can ensure legal compliance through the entire process of going public.
- Engaging in Public Company Accounting Oversight Board (“PCAOB”) audits – SPAC transactions require audited financial statements under the PCAOB standards for the most recent 2 to 3 years, depending on the size of the Company. Completing the above bullet points will make the PCAOB audits more efficient in terms of timing and costs. SPACs have a finite life of usually 24 months. Timing is imperative for obtaining merger approval, so having audits already completed tremendously shortens the approval timeline.
Overall, the past year has seen tremendous growth of the SportsTech sector with a significant rise in de-SPAC transactions. As a startup tech company with the goal of one day becoming public, it is imperative to begin operating as a public company to streamline the process if approached by a SPAC.