In the last two decades, entrepreneurs and investors have sought alternatives to participate in stock markets. This led to the creation of Development Capital Certificates (Certificados de Capital de Desarrollo) (“CKDs”), Investment Project Certificates (Certificados de Proyectos de Inversion) (“CERPIs”), and Infrastructure and Real Estate Trusts (Fideicomisos de Infraestructura y Bienes Raíces) (“FIBRAs”). However, the search for different options continues, and the most recent of these are Special Purpose Acquisition Companies (“SPACs”). 


SPACs are investment vehicles by which a sponsor conducts an initial public offering ("IPO") to raise capital and, with those resources, acquires funds to later conduct a merger or acquisition of one or several companies in a specific industry. These vehicles support a unit that is comprised of a share and a warrant option, which can be exercised by the holder and will be explained in detail further below.  

Based on the above, SPACs are often referred to as "blank check companies" because, at the time of their listing, they have no assets or activities. The value that the units listed on the Stock Exchange may have will be related to the level of projection generated by the people behind the SPAC. 


I. General Information 


SPACs have existed for decades; however, they used to be seen as a last resort for a company to go public. Thus, they were promoted in the United States by David Nussbaum in 1993 as an exception to the then-prohibited "blank check companies". In Mexico, the Mexican Stock Exchange ("MSE") announced the entry of SPACs as a new investment vehicle in 2017. 


Notwithstanding the above, SPACs have recently become popular, as they have been considered a great alternative to conducting a traditional IPO for companies. This is driven by top-tier sponsors who are now launching SPACs, such as Apollo, Pershing Square, and Ribbit, among others, and high-quality/high-profile companies like Multiplan, Nikola Motors, Open Lending, Virgin Galactic, among others, who are merging with them. Gradually, investors and targets are becoming more comfortable with the way the SPAC economy works and seeing its advantages.  


According to space data.com1, globally, during 2021, 613 SPACs were listed, with an average capital raised of 265.1 million dollars, during 2022, 86 SPACs were listed, with an average capital raised of 156.2 million dollars and so far during 2023,12 SPACs have been listed with an average capital raised of 109.6 million dollars. 


In the last decades, there has been a decrease in the number of companies listed in the United States and Mexico. This is due to the high expenses and the time-consuming involved in the process of becoming a publicly listed company. The SPAC becomes an alternative for "young" companies to achieve the process of becoming a publicly listed company. Additionally, the process of listing through a SPAC is shorter. 


Another important aspect is that in a traditional IPO, projection reports are not allowed, while SPACs, as a merger that generates projections, are allowed to report them as an exception to the IPO rule. 


II. Mexican regulation of SPACs  


While there is specific regulation in the United States for the formation, operation, and listing of SPACs, such regulation does not yet exist in Mexico, except for the internal regulations of the stock exchanges.  

On the other hand, on November 2017, when the MSE included SPACs as a new investment instrument in Mexico, it modified its regulations to allow for the operation and existence of SPACs. This exception allows SPACs to incorporate their equity capital through the resources obtained from the placement. 


"4.008.01"


I to X...


The Exchange may approve exceptions to the provisions of the preceding clauses I and III, provided that, in its opinion, they are issuers or an Investment Promotion Stock Company (Sociedad Anónima Promotora de Inversión) (“SAPIs”) with growth potential. About the requirement referred to in the preceding clause II, the amount of the accounting capital may be incorporated with the resources obtained from the corresponding placement transaction, provided that they are specific purpose companies whose purpose is to acquire by any legal means other private companies, on the terms established in the respective placement prospectus." 


III. Operation and Functioning of SPACs 


To understand how a SPAC operates, it is necessary to first understand who the sponsor is and the role they play within the SPAC. As a general idea, the sponsor is the entity that promotes the SPAC from its incorporation to the merger of the SPAC. 


In most of the SPAC placements that have been conducted, sponsors are usually investment funds (Private Equity Investment Funds). Thus, the sponsor will be the "first investor" in the SPAC as they will lend the necessary funds before the IPO, and the sponsor will purchase founder shares and warrants (usually up to 25% of the total share capital considering what will be issued in the placements), choose the first members of the SPACs board of directors (essential to giving investors certainty), and often, lend additional funds for the SPACs merger. 


SPACs operate as follows: 


  1. The sponsor sets up a new company, which purpose is to raise funds through an IPO conducted on a Stock Exchange. This is to locate a target company in the chosen sector and merge with it. 
  2. The company is listed without having any prior assets or operations, so the projected amount to be raised will be determined by the SPAC sponsor. Units are listed on the Stock Exchange, which consists of: 


(i) One share. 

(ii) One Warrant2 or Optional Title, which is usually set at two separate times for exercise: 

i. Thirty days after the SPAC merger (also known as De-SPAC). 

ii.  twelve months after the IPO date. 

It should also be considered that a warranty does NOT imply that the underlying shares are subscribed to and paid for, which is important because exercising a warranty will result in the company obtaining new funds for its capital.  


  1. A deadline is set for the first acquisition or merger with a company in the industry for which the SPAC was created. Deadlines are commonly set between eighteen to twenty-four months. 
  2. Once the funds are raised, a portion of such funds is allocated to an escrow account to safeguard the funds for future financing of the merger with the target company. The funds allocated to the escrow account are usually invested in government instruments. 
  3.  The sponsor retains another portion to finance the working capital of the SPAC and operates to find the target company and conduct negotiations with it. 
  4.  At the end of the deadline, there are several possibilities: 
  5.  The first transaction is not completed: This can happen due to two assumptions: 
  6.  The SPAC does not find a target company to merge with, so it must return the capital invested in the SPAC to its shareholders; or 
  7.  The SPAC finds a target company; however, the investors do not approve the merger. The SPAC must return the capital invested in the SPAC to its shareholders. 

 

 How will the money be returned and what happens to the company in that case? 


The refund is usually made through cash payments to the investor. It should be noted that, as mentioned, most of the funds raised by the IPO are sent to an escrow account, which is usually a trust to manage and retain the funds obtained. Usually, investors will have to deliver their shares to the SPAC administrator two days after notifying them that they wish to exercise their redemption right. 


On the other hand, SPACs consider the failure to complete the merger within the established time frame and/or the extension granted as grounds for dissolution. In that sense, the SPAC must cease activities, keeping only those necessary to conduct its liquidation, including payment to its investors. 


  1. The first operation is conducted: If a SPAC finds a target company and the investors approve the merger with it. 

 

Once the merger is approved, shareholders have the following options: 

 

  1. Investors decide to maintain their current stake and hold onto their warrants. 
  2. Investors decide to increase their participation in the company's capital by exercising their right granted by their warrant; or 
  3. Investors decide to withdraw their investment, receiving the amount invested in the IPO. 


IV. Functioning of SPACs. 


  • SPACs usually list their shares at a value of USD 10 and typically set a previously agreed-upon value of USD 11.50 for shares subscribed to through warrants. 

 

  • The success projection of the SPACs will be linked to the reputation of the sponsor conducting the operation. 

 

  • Investors can request that the share included in their unit be redeemed. 

 

  • Whenever the redemption right is exercised, the price to be paid is the initial value of the share, so if the share was acquired at a higher value, the difference in the paid price will be lost. 

 

  • It is common for promoters to attract institutional investors or investment funds unrelated to the sponsor to raise more funds for the SPAC. 

 

  • Shareholders can obtain a "profit" by requesting the redemption of their share at the time of the merger while retaining their warrant and being able to acquire a share in the subsisting company once they have analyzed the merger outcome. 

 

V. Differences with the operation in the US  


As of 2023, in the SPACs that have been listed in Mexico, the trend has been to use the legislation for public listings, with small adjustments. Adaptations have been made to almost entirely adopt the process followed by SPACs in the United States according to their applicable legislation. 


However, certain differences have existed regarding the process followed by SPACs listing in Mexico compared to those in the United States, such as those listed below: 


  1. There is no specific regulation for SPACs, so the procedure will be subject to what the sponsor decides. 
  2.  In the United States, sponsors have a profit of 20% of the equity raised by the SPAC after the merger. In Mexico, the same is usually used without any regulation on the matter.  
  3.  In Mexico, the possibility of separating and trading warrants in isolation from share certificates has not been established (according to the placement prospectuses of Vista and Promecap). 
  4.  There is no specific legal framework for SPACs, although they have been conducted through SABs, it is not mandatory to do so. 
  5.  Trading of shares in Mexico is limited, and it is often established that authorization is required to acquire more than 10% of the SPACs capital. This is a limitation that seeks to protect the company's capital, according to the placement prospectus. 
  6.  Different limitations for the reimbursement of shares to shareholders, with the right to reimbursement being more controlled. 
  7.  This means that there are differences for shareholders in the United States, who can decide to redeem their shares at any time, seeking to protect their investment. Some specialists consider that this right is likely to be modified in the future and that it has only arisen as a way to promote SPACs, as it implies a significant risk for the company to lose the capital obtained from the merger. 


VI. Disadvantages of SPACs 

 

  1. The dilution effect for company owners and investors through the sponsor's promotion (20% of SPAC revenue) and warrant structure. 

 

  1. An inherent conflict of interest in the sponsor's investment recovery value is linked to the price paid for a merger. 

 

  1. The SPACs projection will depend heavily on the sponsor's reputation, so the company's outcome can improve or harm its future reputation. 


VII. SPACs in Mexico 


The only two precedents that exist in Mexico have been conducted through publicly traded companies, which, as mentioned earlier, have corporate structures that resemble a SPAC structure which is as follows: 


  1. The first SPAC in Mexico was issued on August 2017 and was Vista Oil & Gas S.A.B. de C.V. (Vista Oil & Gas), sponsored by Riverstone. Half was placed on the MSE, while the remaining 50% was listed on international markets. The offering raised USD$ 650mn. Its purpose was to raise funds to acquire one or more energy sector companies in Mexico, Colombia, Argentina, and Brazil. 
  2. The second SPAC was listed on March 2018, and it was Promecap Acquisition Company, S.A.B. de C.V. (Promecap). In this case, 79.02% was placed in Mexico, while 20.98% was listed in international markets. The goal was to raise funds to invest in family-owned companies, private equities, and publicly traded companies dedicated to high-growth sectors. On March 14, 2020, they announced the acquisition of Acosta Verde (medium-sized shopping centers, mainly in northern Mexico) for US$ 200 million and its listing on the MSE. At the end of September 2020, Acosta Verde was officially listed in the MSE through its merger with Promecap, without Acosta Verde having had an IPO in its history. 

 

Both companies listed their Units at the equivalent value of USD$10, which at the time was MXN$180. 


On the other hand, some Mexican companies have preferred to merge with SPACs in the United States, such as: 


  1. Betterware de Mexico S.A. de C.V. (Betterware), merged with DD3, sponsored by DD3 Mex Acquisition Corp., an affiliate of DD3 Capital Partners, led by former Goldman's partner Martin Werner, on March 13, 2020, making Betterware the first Mexican company to directly list on the NASDAQ Stock Exchange. 
  2. LIV Capital followed the same path as Betterware and is currently listed on NASDAQ. 

 

In the Institutional Stock Exchange (Bolsa Institucional de Valores) (“BIVA”), the second authorized stock exchange in Mexico, there is no prohibition against this possibility in its internal regulations, as it began operations in 2018. However, to date, there are currently no SPACs listed on BIVA, although Bricks Acquisition Company expressed its intention to be listed on BIVA in 2019 and 2021. 


VIII. Conclusions 


The creation of this type of vehicle has represented a viable alternative for emerging companies globally under its proper regulation. In Mexico, the market has remained closed, and to date, only two launches of this instrument have existed, in addition to a lack of regulation, although for some years, the market in Mexico has managed to open its doors and institutionalize these processes. 


Likewise, through SPACs, it is noticeable that the path to carrying out an IPO is much more efficient since this model facilitates the process for companies to achieve listing on the stock exchange, as it supposes advantages in terms of time and more agile processes to access better sources of financing and allow their shareholders an easy exit for their investment.