Thursday, October 02, 2008

SPACs: Now, Public Venture Capital Is Even Prettier

(Warning: This post is going to talk about "public" venture capital, which means that somewhere in Montreal Mark McLeod is pulling out his hair and screaming.Fear not, my little coureur de bois: I will be speaking unfavourably about them.)

As you look for new sources of growth capital, here's a phrase you're going to hear a lot from Bay Street: roll-up. Instead of worrying about raising $4-5 million, they'll say, why not consolidate your current business with a few others through the public markets? And then they'll breathe a single acronym in your shell-like corporate ear: "SPAC."

Amid the chaos of this week, partners at Canada's largest law firms and investment banks have found a new life raft to cling to: the special purpose acquisition vehicle ("SPAC"). Long-banned from listing on the exchanges up here, a few weeks ago the comment period passed for a rule that would now permit trading of these vehicles, and the rule is in its final stage of adoption. A whole new investment vehicle: think what this means to us lawyers. Even if our mergers and acquisitions practice has gone south, even if our expertise lies outside of restructuring, we can still cling to the dream of the SPAC, which will allow us to continue to generate large fees on public market deals. Can I get an "amen", brothers and sisters?

What is the SPAC? Think of it as a capital pool company on steroids. It is a shell company listed on an exchange that has no operating business at the time of listing. The company has a management team of experienced management (think of those who would have appropriate experience for managing a publicly listed company) and sophisticated investors. Here's the key difference between an SPAC and a CPC: the SPAC must have a significant market capitalization - currently proposed in Canada to be $30 million. Once raised, the SPAC then has a similar period of time to find a qualifying transaction to roll into the shell.

I'm glossing over a number of technical details here to make a few practical points: SPACs have succeeded in the US as vehicles of hedge funds to park money. There are very few data points that would suggest SPACs succeed in attracting and acquiring solid businesses that in turn become solid public companies. Certainly, they will not be effective sources of capital for technology based companies in the United States. There are very few analysts covering technology sectors in the US anymore, thanks to the crackdown by Eliot Spitzer a few years (and young women) ago. How does a technology company create and engage an investor base without any star analysts? Or for that matter, how do you convince investors that there is still money to be made in tech stocks on NASDAQ?

The questions are not that different for SPACs here in Canada. Most of us in this space would agree that there is a strong base of pro-tech investors who are active on the TSX. And there is evidence that the CPC program is attracting more of them from abroad - take a look at Colorado-based ID Watchdog Inc ., which just announced a raise of some $10 million on the venture exchange. But what will SPACs do for the tech community, or any other Canadian industry?

In the near term, much of this won't matter up here. The professional fees that can be charged just to obtain the initial listing are impressive (just ask those who have been over-paying for years to achive the same listing as a CPC). Watch your in-box for breathless updates on the passage of the amended rules, but do it with a modicum of cynicism.

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