We briefly mentioned the entities called Special Purchase Acquisition Companies — SPACs — in our last issue of Kanna Knowledge. While this funding mechanism is not new, it entered the limelight in 2020 as a number of cannabis companies were taken public through this method. And with 2021 looking to be a challenging year for cannabis companies in search of capital, SPACs are likely to become more prominent. In fact, just since this new year began, 40 SPACs have already filed for IPOs totaling $11 billion.
Traditional IPOs have not been the best match for cannabis companies looking to go public. There is a dearth of institutional investors willing to write large checks for new cannabis investments, and the pricing of cannabis IPOs is often erratic. SPACs are different inasmuch as they allow cannabis companies to go public without having to deal with an investment bank or any other part of the cannabis-challenged traditional banking system.
A SPAC is a vehicle to raise capital through an initial public offering (IPO), earmarked to acquire an existing private company and take it public. SPACs are publicly traded on NASDAQ and other big-board exchanges, and are often called “blank check” companies as investors are in theory giving the sponsor carte blanche to acquire a suitable target with invested funds.
For example, a SPAC in the industry eye right now is Schultze Special Purpose Acquisition Corp., trading on the NASDAQ as SAMA. This SPAC was formed by sponsor Schultze Asset Management with the intended purpose to acquire a majority of international cannabis cultivator Clever Leaves. Another NASDAQ-listed SPAC is SSPK, Silver Spike Acquisition Corp., which is planning to merge with Weedmaps — a well-known SaaS cloud solution for cannabis dispensaries.
SPACs have a set amount of time, typically 18-24 months, in which to make an investment, which must also be approved by shareholders. If a merger or acquisition cannot be made, the money — which sits in trust earning interest — is returned to investors. If a deal is announced, investors have the option to decline further participation and get their money returned. Completing the deal, and closing the SPAC, is known as the “de-spac.”
SPACs are also a great vehicle to merge multiple companies together and create a strong single entity. Many of the cannabis companies that have gone public via SPACs have successfully grown their businesses and have healthy futures in the marketplace. You will find SPACs also being used by private companies in similar unconventional industries; for example, both sports betting site DraftKings and Sir Richard Branson’s Virgin Galactic space exploration company went public with this approach.