Special Purpose Acquisition Companies (SPACs) are all the rage right now. In 2020 alone, 248 SPACs raised USD $83 billion. Given the average SPAC size and increased demand, a lot of asset managers are finding themselves with reportable positions in SPACs. Data providers have not caught up with data needed to monitor and report on SPACs.
Let’s analyze a typical SPAC listing and the data requirements for monitoring and disclosing beneficial ownership of over 5% under the Securities and Exchange Act of 1934 (SEA).
In order to determine if a position is reportable under Section 13 of the SEA, beneficial owners need to determine if they have acquired more than five percent of a Section 12 registered voting class of equity securities. Additionally, beneficial owners need to include any position that can be converted into a reportable equity within 60 days.
SPAC offerings typically consist of a unit at IPO that contains an equity component, and a warrant component (there is also often a rights component). These units will often automatically break out into their components for trading 30-60 days after IPO. Let’s analyse these components into the data points we need to monitor for reporting under Section 13 of the SEA.
Are SPAC units in scope for Section 13 reporting?
This might surprise some people, but typically the answer is no. While at IPO the offering is registered under Section 12, the units themselves are not voting securities. The unit is merely a container for components. The equities inside them might be reportable, but the unit itself is not typically reportable under section 12. Since the units contain equities we will need to determine if the equities inside the units are reportable.
Are SPAC equities in scope for Section 13 reporting?
Assuming the equities are voting and the offering is registered under section 12 at IPO, holdings are reportable. Now we need to determine the class shares outstanding so we can determine our beneficial ownership percentage. When you buy a unit at IPO, security data providers will typically only have security data for the unit (ISINs, CUSIP, class shares outstanding) but not for the equity (remember these are not tradeable independently until 30-60 days after the IPO). We need this equity data to determine our position today. After crossing 5%, you might have a reportable position due before this data is made available from your data provider (as early as 10 days after crossing the threshold). We cannot use the unit shares outstanding we get from our data provider because in a SPAC offering there are typically founder shares that are held by the SPAC sponsor which are not included in the IPO. This leaves compliance officers to manually read through prospectus documents to find up to date security data. So, while a unit offering might include an offering of 1,000,000 equity shares, the founders might have 200,000 for themselves. In this example, when relying on your data provider, you will often get 1,000,000 as the denominator when it should be 1,200,000.
Are SPAC warrants in scope for Section 13?
SPAC units will often have a warrant and/or a rights component as well. These derivatives often convert into reportable equities typically on the later of 12 months from the unit offering or 30 days after the completion of a business combination. The US rules are only concerned with derivatives that can convert into a reportable class of equity within 60 days that is within the holders control. In this case, conversion is not in the holders control (a business combination) and must be monitored. As soon as the warrants become exercisable they will likely need to be included in the Section 13 calculation. This data is not available outside of a dedicated corporate actions data feed.