As Mark Twain might have written, news of the death of the initial public offering (IPO) in the health care startup space has been greatly exaggerated.
Those involved in corporate securities are well-versed in the hassles of the IPO regulatory process. So, the emergence of a less burdensome way to raise private capital was bound to be extremely appealing. Enter the special purpose acquisition company (SPAC), aka, blank-check company. The model: Digital health, life sciences, and other startups would team with institutional investors to create shell companies that could go public and raise capital on the public exchanges without going through the U.S. Securities and Exchange Commission’s (SEC’s) IPO process.
In addition to low share prices, typically $10 a pop, investors would receive free share warrants. But the blank-check’s ultimate purpose was to seek out a desirable merger target with the new entity continuing to raise money on the public exchanges. If the investors didn’t like the target, they could redeem their shares and still keep their warrants.
After peaking in the first quarter of 2021, with 42 SPACs raising a total of $11 billion, according to S&P Global Market Intelligence, the blank-check company craze has fallen off significantly. Reasons include simple supply and demand, poor post-acquisition performance of many SPACs, the overall sluggish M&A market, investor fraud shareholder lawsuits, and regulatory developments, especially, the SEC’s warnings that SPACs may have to refile their regulatory statements to list warrants issued in connection with going public as liabilities rather than equities.