The use of a special purpose acquisition company (SPAC) to access public capital has become a popular tool in most industries. For the space sector, it all started with Virgin Galactic in October of 2019 and in the last 15 months another $156 billion of capital was raised through SPACs across all industries.
Space is a capital-intensive business and will see even more SPAC activity this year with Astra, BlackSky, Spire Global, Momentus, New Vista Acquisition Corp and most recently RocketLab joining in. There is a rich history of public market debut methods and now, with a new spin on an old method, the SPAC seems to be firmly added to the mix — but is it a legitimate capital tool or just another way to skirt regulators?
Going public by offering to sell shares to retail investors has always been considered the ultimate in a company's journey. The initial public offering (IPO) was originally done through a Securities and Exchange Commission (SEC) process called the S-1. A successful IPO through this process was considered a bragging right that proved you were an investable company, having survived the rigor of the SEC’s strict registration process. It signaled that institutional investors conducted due diligence and approved the offering through an extensive road show that also acted as an “efficient” price discovery process.
Traditional space companies like Lockheed Martin, Aerojet Rocketdyne and Maxar all went through a S-1 IPO process. Most early space companies had sophisticated financial partners to help them access capital markets but were limited to products that were not specialized for their industry. If used properly, SPACs could be great tools within this new infrastructure — tools the original space companies lacked.
Before SPACs, there was another IPO method called the reverse takeover (RTO). The RTO is the acquisition of a public operating company by a private company so that the private company can inherit the public status while bypassing the lengthy and complex process of a traditional S-1. This method gained popularity in the 1990s and 2000s but later analysis uncovered that it was often inefficient. In a Harvard Business Review article Ivana Naumovska describes empirical studies that show RTOs were poor at forming long-term capital mainly due to misaligned incentives and lack of adequate acquisition targets.
A SPAC could be considered a modern evolution of the RTO, with several advantages in terms of structure, expenditure and simplicity. SPAC IPOs, construct blank-check companies that have no operating history, to raise capital in order to merge private companies with high potentials and bypass the need for large due-diligence and transaction costs.
Many space companies are choosing the SPAC process over other options because it offers speed, better structure and price discovery. One of the space industry's first uses of SPACs was by Chamath Palihapitiya’s sponsorship of Richard Branson’s Virgin Galactic in 2019.
SPAC sponsors gain heavily by getting access to large early stage private equity while potentially charging hefty fees, regardless of how well the acquired company does after it’s public. When the SPAC structure does not align the sponsor’s incentives with long-term capital formation, bad things can start to happen. Recently Palihapitiya sold his entire personal ownership in Virgin Galactic, causing the stock to plummet and is now drawing attention from the SEC.
With increased interest in space, public investing and SPACs, regulators have growing concerns with irrational exuberance, poor market structure and protecting investors. The public’s recent “retail short squeeze” on GameStop has only heightened their concerns which now includes the risk of SPACs. Regulators want to avoid the poor performance of RTOs of the 1990s, but they still want to encourage public involvement with the markets — a regulator’s dilemma.
Some SPACs, such as Tontine launched by Bill Ackman and New Vista Acquisition Corp (New Vista) have already adopted more prudent structures. New Vista, chaired by Dennis Muilenburg, former Boeing CEO, is focusing on markets including space, defense and communications. New Vista has assembled $276 million, alongside a complementary sponsorship team, from various disciplines and will invest in a strategic company that will create long term value. We may also see a member of New Vista’s sponsorship team show up in the eventual operating company as an executive — a thoughtful approach that creates even longer term alignment.
Some companies are traveling a third path to go public called the direct listing process (DLP). Originally under DLP, existing shareholders could sell shares on an exchange for whatever the market was willing to pay — but no new shares could be issued. Slack made their public debut this way in 2019 and it proved to be an effective method for creating liquidity but did now allow for additional capital to be raised. Recently, Roblox used an improved DLP method to go public after the SEC announced that it will allow companies to raise fresh new capital through DLP listings — forging another path to raise capital in the public markets.
Of course, some companies that use SPACs will fail, but if the space industry uses the right structural design — which we must — SPACs can offer another legitimate path to an IPO for many others. Regulators need to balance rule making that is intended to improve the quality of public listing while at the same time encouraging the public’s participation in new capital formation. This balancing act is difficult, but key to creating long term sustainability in space investing.