The SPAC phenomenon: Two-way democratization of the U.S. capital markets
“The SPAC wave may present mid-size Israeli companies with an alternative path to the U.S. public markets. And, this path provides greater deal certainty than in a traditional IPO,” writes Jonathan M. Nathan of Meitar Law Offices
While we have all heard a lot about the wave of SPACs in the U.S. markets, and its ripple effect upon Israeli hi-tech companies going public, we do not necessarily contemplate its long-term impact upon the eco-system for all types of Israeli companies, whether big or small, that seek U.S.-based capital, or for investors that would like to invest in all types of Israeli companies. It may be that the SPAC phenomenon has a lasting, systemic impact on that ecosystem in a manner that is “pro-democracy”.We have seen some quiet times, and more active times, as to the quantity and quality of Israeli companies debuting on Wall Street, but nothing like the frenzy that began in 2020.
Yes, the trillions of dollars of stimulus pumped into the U.S. capital markets by consecutive U.S. administrations has been the primary catalyst. And yes, Israeli unicorns that have launched on Wall Street account for the bulk of the over $200 billion of market cap of Israeli companies traded in the U.S. capital markets.However, as much as there is a generous supply of top-tier Israeli companies being taken public by bulge bracket underwriters, that alone is nothing new. Top Israeli companies have always been coveted by Wall Street. The SPAC phenomenon, on the other hand, has the potential to be a real game changer, to effect a real democratic revolution. My partners and I have been searching for years for the ideal landing ground for mid-size Israeli companies— companies with great technology and growing revenues in the approximate $50 - $150 million range. These companies have been too small and not “sexy” enough for the bulge bracket Wall Street underwriters. We’ve examined various alternative foreign and Israeli listing options. Unfortunately, none of those has panned out consistently. The onset of the SPAC wave opens the possibility of a U.S. listing for these mid-size Israeli companies, through the model of the back-end, de-SPAC business combination. A new group of SPACs, more familiar with the Israeli market, have begun to target that market, and may provide the right match for these mid-size companies. No longer will these companies be relegated to private financings. The SPAC wave may present these mid-size Israeli companies with an alternative path to the U.S. public markets. And, this path provides greater deal certainty than in a traditional IPO, with complementary financing fairly readily brought through a PIPE. This democratic revolution is not merely unidirectional. Just as companies benefit, so do “mom and pop”/”Main Street” investors who can now invest in those companies as well. This provides a real reason to be hopeful. There are indeed important legal safeguards built into this process, and there may be additional ones coming. At the SEC, “principles-based disclosure” has replaced old, archaic disclosures. The focus upon accounting treatment for warrants, while seemingly technical, has slowed the SPAC/de-SPAC process, enabling participants to examine prospectuses for adequacy of disclosure. At the back end of the process, supplemental limits on the use of forward-looking statements in de-SPAC transactions could be on their way, which could add a further safeguard. In addition, the participation of experienced, accredited investors in the PIPE transaction that typically accompanies the de-SPAC merger serves as a vetting process. Overall, given the SEC’s dual purposes of facilitation of the capital markets and protection of investors, the SPAC phenomenon can be a “win-win”, including, most importantly, for Main Street investors, who can soon better benefit from an additional crop of companies from the land flowing with “milk, honey and technology”.
The author is a partner at Meitar Law Offices in Ramat Gan, Israel, where he has played a significant role in the U.S./Global Capital Markets group practice since his arrival in 2008.