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What are words worth?
What is a SPAC? A SPAC, or special purpose acquisition company, is not a new type of financial vehicle and has been around for some time. Their rise in prominence of SPACs is being driven by what their proponents believe are advantages over traditional IPOs in that they can provide certainty over pricing and a greater degree of control over price terms. The process for a SPAC transaction can also be quicker than a traditional listing route.
What is a cash shell? Initially a SPAC will be a cash shell and will publish a prospectus that will define which type of transaction and which sectors it is hoping to identify as a target. Typically, the SPAC will have a window of up to two years to deploy the cash raised, which is held in trust until a transaction takes place. Shareholders are able to redeem their initial investment – typically shares of $ 10 per unit – minus some costs if they do not wish to hold shares in the eventual target. The structure of the investment in a SPAC often takes the form of shares plus warrants, which gives the holder the right to acquire more shares at a set price. The SPAC shares trade once it has launched.
What is a PIPE? Effectively, investors in the initial SPAC are buying into the expertise of a management team to identify targets. They will also raise the additional investment normally needed to fund the deal, called the private investment in public equity( PIPE). This new money will provide the leverage for the deal. Matt Davey at Tekkorp says the PIPE investment is crucial.“ Public investors want to see the PIPE alongside the deal because PIPE investors provide other investors with an independent validation of the valuation,” he explains.
May 2021