Show me the money: Investors in Hub Security’s SPAC still haven't deposited the money

Will Hub Security's SPAC offering on Nasdaq be canceled? The cybersecurity company canceled the shareholders' meeting scheduled for Sunday, where the change in the identity of the PIPE investors participating in the company's SPAC merger with Mount Rainier, which is scheduled to be closed this week, was supposed to be approved. In addition, Hub Security announced that the participants of the offering have not yet deposited the money in preparation for the closing, as is customary in a SPAC deal. A-Labs, a consulting and investment body that also provides underwriting services in exchange for commissions and options, was meant to be responsible for the bulk of the investment, as well as receiving $2.5 million in commissions upon completion of the transaction. Other investors include a family office named Mofo headed by Moshe Schlisser and hedge fund manager Guy Ben-Artzi. In order for the SPAC to be completed, the scope of the offerings must be at least $50 million.

Eyal Moshe.

Hub Security was supposed to complete the merger at a value of $1.28 billion at the beginning of February. However, two weeks beforehand the company announced that it was postponing the completion date of the merger to the end of this month. Two weeks after the announcement of the postponement of the completion date of the merger, Hub Security revealed the reason behind it: one of the investors in the company, the Clover Wolf hedge fund, withdrew and decided not to invest in the company as part of the merger. This $10 million investment was part of the PIPE fundraising (private investment in public equity).

SPACs (Special Purpose Acquisition Company) are companies that are issued and raise money from the public with the aim of merging into private companies. They undertake to do this within a specified period of time, usually two years, and if they fail to do so, they return the money to the investors plus interest. This is not a new investment tool, but it gained momentum in 2020-2021, and through it many companies, including various Israeli companies, reached the U.S. stock exchanges.

While the SPAC is raising the money from the investors, it does not know which company it will merge with, and that is why it is possible to withdraw the money after a merger deal has been concluded. After signing such a deal, the company embarks on another fundraiser known as a PIPE - which is done when the investors know what they are choosing to invest in. This investment round usually includes "stronger hands" such as institutional bodies and hedge funds, and these investors do not get the option to redeem the investment. Clover Wolf invested at this stage, so its withdrawal is a real drama. In the first announcement by Hub Security regarding Clover Wolf’s withdrawal, the company said that the fund was disbanding and therefore the investment was canceled, but two and a half hours later the company corrected the report and said that Clover Wolf was not disbanding, but "decided to stop this type of investment".

Lawsuit to come?

Amazingly, although the grantee’s money has not yet been transferred to the company's bank account in the U.S., sources close to Hub Security told Calcalist that the company did not appeal to the grantees with a demand for the transfer of the capital to which they had pledged even though it is clear that the grantee’s commitments cannot be canceled. This decision was made, among other things, with the aim of allowing Hub Security to sue them later. If the merger is canceled, Mount Rainier is expected to sue Hub Security, who will then sue the grantees. These answers from those close to the company raise a very large question mark regarding how committed these grantees were to investing in the first place.

Sources close to the company also said that Hub Security found alternative sources for those grantees but refused to reveal their identity and the scope of their investment. Finding new investors within a few days would be particularly surprising in light of Calcalist's report from the beginning of the month, according to which representatives of Hub Security, led by the former CEO Eyal Moshe, tried to raise NIS 10 million in debt from Israeli investors, institutional and private, to improve the company's balance due to the difficulties in collecting from customers. Hub Security offered an interest rate of almost 10%, along with options in the company, but was unable to raise the requested amount.

Against the background of these difficulties, Moshe was removed from the position of CEO and replaced by director Uzi Moskovitz. Moshe's partner, Ayelet Bitan, who was the vice president of human resources, also resigned. Hub Security announced that Moshe will serve as president and focus on its activities in the U.S., but his name no longer appears on the company's website.

Hub Security, which began trading in Tel Aviv in June 2021 after merging with ELD, publishes its financial reports only twice a year. As of the end of June 2022, it had only NIS 38 million in cash (approximately $10.3 million). The merger expenses have so far reached to NIS 15 million ($4.1 million), and they are set to jump for the second half of 2022. Based on its results in January-June 2022, its annual loss rate stands at NIS 140 million ($38.2), which clarifies why the company has reached the finish line for its Wall Street IPO desperate for cash.