Are Blank Check Acquisitions (SPACs) Disrupting the IPO Market?

Blank check acquisitions, or Special Purpose Acquisition Companies (SPACs), have been generating significant buzz in recent years. Often seen as a game-changer in the capital raising landscape, SPACs represent a novel approach to the traditional Initial Public Offering (IPO) process. But how are they impacting the IPO market, and what role can the Fairshare Model play in this evolution?

Understanding SPACs and Their Impact

SPACs are shell companies that raise funds from investors, with the specific intention of merging with a privately held company that will become publicly listed. While SPACs have been around for a while, their surge in popularity can be attributed to the allure of tapping into a wide pool of non-accredited investors. This flexibility sets SPACs apart from traditional IPOs and private equity acquisitions.

It is often believed that SPACs might cause significant disruption in the IPO market. However, a closer look reveals that SPACs are more impactful in the venture capital (VC) or private equity space. This is due to their distinct features: investors have tradable shares, and the ability to raise capital from non-accredited individuals brings a new dimension to capital raising.

The question arises: if a company raises money through a SPAC and succeeds, what happens next? There are two primary paths:

The company might go for their own IPO, offering its shares to the public market. The company could also be acquired by another entity.

The Fairshare Model and Its Potential

In my book, The Fairshare Model: A Performance-Based Capital Structure for Venture-Stage Initial Public Offerings, I delve into various aspects of performance-based capital structures. The Fairshare Model proposes a unique approach where performance stock is distributed to investors, and conversion criteria are established based on the company's performance.

Once the discussion about the Fairshare Model gains momentum, the categories of companies will likely expand and refine. Here, I offer two general ideas to spark your imagination. I will skip the first idea for brevity, but focusing on the second idea will help illustrate the potential.

The second idea involves a public venture fund that raises capital using a Fairshare Model IPO. Securities law allows companies to raise capital to invest in other firms. If a specific target company is identified, detailed disclosures are required. However, in the absence of a target, general descriptions of how the capital will be used are adequate, leading to a "blind pool" or "blank check" offering. Typically, venture funds are limited to accredited investors, but by raising capital publicly, average investors can participate.

The Potential of SPACs with a Focus on Specific Interests

SPACs could be tailored to attract investors with specific interests. Here are some possible focus areas:

Geo-centric: Investments in companies located in a specific geographic area. University-centric: Ventures supporting startups closely tied to a university, such as licensing intellectual property from or involving alumni. Industry-centric: Backing companies in sectors with difficulty attracting VC interest, such as agricultural resource conservation, alternative energy, and services for the elderly. Demographic-affinity: Targeting companies based on demographic qualities of founders or their target customers, such as gender, age, and ethnicity.

Application of the Fairshare Model in SPACs

If the Fairshare Model were to be applied to a venture fund that raises capital through a SPAC, key considerations would include how to distribute Performance Stock and define conversion criteria. For instance:

Performance-based distribution: Investors would receive Performance Stock based on the fund's performance. Conversion criteria: The criteria for converting Performance Stock to Investor Stock would depend on the fund's performance and the specific goals of the SPAC.

In cases where the fund focuses quasi-charitable investments, the Performance Stock could have voting rights but minimal chances of converting to Investor Stock, aligning with the fund's philanthropic goals.

Conclusion

SPACs represent a significant shift in the way companies seek capital, offering a pathway for non-accredited investors and catering to specific investor interests. The potential for the Fairshare Model in this space is vast, allowing for more inclusive and performance-driven capital structures. As the market continues to evolve, SPACs and innovative models like the Fairshare could play a pivotal role in shaping the future of IPOs and venture funding.