Introducing the Up-SPAC Structure
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As the pace of SPAC IPOs continues to set records, evolution of the economic terms has accelerated. We have seen changes to the warrant and promote structure (including “tontine” warrants), call rights motivating cashless exercise of warrants, and warrants in lieu of promote shares. But the SPAC structure itself is also an area ripe for evolution. One possible adaptation is the “Up-SPAC”, which capitalizes on the SPAC trend by combining, at the launch of the IPO, a traditional SPAC IPO structure with the added value, flexibility and tax benefits of a traditional Up-C structure.
With the rise in popularity of de-SPACs as a way to access capital markets, the landscape is becoming increasingly competitive. Sponsors and SPACs are looking for ways to distinguish themselves and add value for both SPAC and target company shareholders. Some shareholders may be more receptive to structures that result in less dilution from founder shares. In addition, some sponsors may prefer “profits interest” tax treatment for their founder shares.
One proven solution that could create shareholder value and tax advantages if applied to SPAC IPOs is the Up-C structure (which is particularly advantageous for corporate issuers who expect to have material tax burdens in the future or who may be valued based on multiples of distributable cash). The “Up-SPAC” structure combines two well-known IPO structures, the SPAC and the Up-C, which allows founders to provide additional value through their founder shares. This value is created through the generation of tax basis step-up to the SPAC upon future conversion of founder shares into SPAC Class A shares. The added value to the SPAC is directly proportional to the value of the founder shares, offsetting some of their perceived dilution. The Up-SPAC structure also potentially allows the founder shares to be issued pursuant to profits interest rules, which sponsors often prefer.
An Up-SPAC is essentially a SPAC structured as two entities at IPO: (1) a SPAC “Pubco”, which would be the issuer of Class A shares to the public (and would be treated as a corporation for tax purposes), and (2) an LLC “Opco”, which would be partially owned by the SPAC Pubco (and treated as a partnership for tax purposes). Founder shares could be issued as units in the LLC Opco (as profits interests) with corresponding non-economic, voting Class B shares of the SPAC Pubco. Founder warrants might also be exercisable at the LLC Opco level. After de-SPAC, the founder shares/units of LLC Opco would be exchangeable for Class A shares of SPAC Pubco as and when the founders are ready to sell shares. The SPAC Pubco would receive a tax basis step-up in any appreciated assets upon the exchange, as in a traditional Up-C, creating value for shareholders. The structure could be implemented with or without a tax receivable agreement (a “TRA”), depending upon the desire of investors and sponsors.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.