To strip away the vehicle's stigma, SPAC advocates like investment banker David Nussbaum built in safeguards aimed at preventing promoters from hoodwinking investors. Seeking legitimacy for the vehicle since the early 1990s, Nussbaum, the chairman of EarlyBird Capital, worked out the template used by most of the current batch of SPACs with the SEC, he said at an ICR conference call in January. (Last week, EarlyBird reported that it had "received an inquiry from the NASD" and that it is "cooperating fully.")
Under the structure devised by Nussbaum, management teams, which collect no salaries, also hold 20 percent of the stock and must purchase warrants — both of which become worthless if they can't arrange a merger.
Typically, sponsors of the deals put 85 percent to 95 percent of the proceeds into the trust accounts, with the remainder going to legal and administrative costs. The money is only released when the merger happens; if it doesn't occur within the deadline, the funds are returned to the SPAC's shareholders.
Critics of the deals can even have a hard time calling them blind pools these days, since shareholders get to see the company they're buying before they buy it. After a likely target is unearthed by the SPAC's management team, a majority of shareholders must vote in favor of the deal and no more than about 20 percent can choose to liquidate their shares for the merger to go ahead.
Still, the uncertainties SPAC investors inevitably face in the early going still rubs some people the wrong way. "How can you invest in something you don’t know about?" asks Gregory Sichenzia, a partner with the Sichenzia, Ross, Friedman, and Ference securities-law firm. "That’s why I think they're flawed."
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