SPAC’s party draws to a close

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The bottom line

Earlier this week, the fast and casual burger chain BurgerFi received a deregistration notice from the Nasdaq. The company had delayed filing its annual report, a delay caused by new reporting requirements for companies going public by PSPC.

A PSPC is a special purpose procurement vehicle that uses public investor money to buy private companies and make them public. And for much of the past year, they were all the rage. More PSPCs have been created so far this year than all of 2020 combined – and 2020 had more PSPCs than each of the previous seven years combined.

This popularity is now at a standstill. There were only 10 PSPCs in April, up from 109 in March, according to SPAC Research. Investors have clearly cooled on them. CNBC’s SPAC 50 index (yes, it has a SPAC index) is down 19% from its March high.

The restaurant industry has been a popular place for PSPC creators and investors. There are half a dozen such companies potentially targeting the restaurant industry, with another PSPC with a merger deal in place. Former executives at Sonic, Dunkin ‘, Jamba, and Barteca are all involved in a SPAC, as is restaurateur Danny Meyer.

Most of these shell companies have potential targets outside of the restaurant industry, and all could basically buy whatever they decide. They have two years to make a deal, otherwise the company dissolves, which tends to ease any restrictions that were on the shell company’s list of potential targets.

Having such a large number of PSPCs in the restaurant industry will make it more difficult for them to make deals within the industry, especially those targeting quick service restaurants. And the companies that most of these typos would rather target probably don’t want to go public that way. Namely: Torchy’s Tacos, which could have had its choice of PSPC, but is considering a traditional initial public offering instead.

But that brings us back to the BurgerFi situation and the SEC letter.

Earlier this month, the SEC wrote a letter regarding what it calls the “de-PSPC transaction,” or the agreement that merges PSPC with the private company, and the various disclosures that accompany it.

“If we do not treat the de-SPAC transaction as the ‘true IPO’, our attention may be focused in the wrong place, and potentially problematic forward-looking information may be released without proper guarantees,” John Coates, acting director of the SEC’s corporate finance division, wrote earlier this month.

The new reporting requirements for these PSPC agreements led to BurgerFi’s earnings report and then put it in non-compliance with Nasdaq requirements, which is a difficult situation for the first profits of a public company.

It remains to be seen whether this denigrates other restaurants on the PSPC offers. It was already going to be difficult for many PSPC restaurants to get the deals they wanted to close within the two-year timeframe. The potential headaches of the SEC will likely do them a disservice.

With many more likely buyers of restaurant chains and traditional IPOs starting to open up to stronger chains again, PSPCs may find it even more difficult to close deals – at least in the restaurant space.

Either way, the PSPC party is probably over. It was nice while it lasted.



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