Utility Companies and the Sudden Rise of PSPC – Corporate / Commercial Law

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In Mintz’s recent article – “Public Interest Companies Go Public”, we predicted that as Special Purpose Acquisition Companies (“SPAC”) reappeared as an alternative to initial public offerings (” IPOs ”), public benefit companies (“ PBCs ”)) would begin to be made public through the PSPC process. Unsurprisingly, two PBCs have done just that recently, and it looks certain more PBCs will follow suit. It is important to note, however, that regulators such as the United States Securities and Exchange Commission (the “SEC”) are increasingly focusing on monitoring the PSPC, which can slow the frequency of PSPC transactions as a result. that regulators issue new guidelines and enforcement measures.

As described in previous Mintz articles – “Can I Raise Venture Capital as a PBC?” and “What are my exit options as a PBC?” – a PBC is a legal form of company created by the State of Delaware in 2013 which, among other things, codifies the social mission of a company.1 A PBC enables a board of directors to make business decisions based not only on the economic interests of the company’s shareholders (as required by the traditional business form of C-Corporation), but also on the mission of PBC, which can focus on the interests of those materially affected by the conduct of the company, including employees, customers, communities and the environment. PBCs are increasingly accepted as companies and markets increasingly insist that businesses generate positive social impact alongside profits.

Along with the rise of mission-driven PBCs, there is the resurgence in popularity of PSPCs, which have dominated the markets for the past two years as an alternative IPO strategy for many companies interested in accessing in the capial. Mintz’s full report produced in collaboration with PitchBook, Breaking the surge in PSPC: examining the main trends and issues defining the phenomenon (the “Mintz SPAC Report”), highlights this trend. For example, in 2020 nearly $ 125 billion was raised in hundreds of PSPCs with 123 PSPC mergers announced or closed for a total of $ 59.3 billion.

The process of publishing an SPAC transaction can be faster, but no less complex, than a traditional IPO. Here’s how the process works:

  • First, the founding investors (“sponsors”) form and operate a shell company with no business operations formed to raise capital through an IPO (a “PSPC entity”). The purpose of the PSPC entity is to acquire or merge with an existing operating company (a “Target”) that allows the Target to become a public company. The sponsors buy founding shares of the SPAC entity for a nominal amount, which translates into a stake of around 20% of the capital after the IPO.
  • Second, the PSPC entity raises capital under an IPO by issuing units of common stock and warrants to investors, with the proceeds held in a trust until the target is acquired or that PSPC expires. At the end of these two stages, the resulting public entity is a holding company with a pool of funds held in trust to finance the acquisition of one or more targets.
  • Third, after the PSPC IPO process, a PSPC entity undergoes a “de-PSPC transaction”. Similar to a traditional merger and acquisition process, sponsors examine potential targets, and once a target is identified, closing conditions often require concurrent private investment in public capital, traditionally known as PIPE, to complete the merger.
  • Fourth, the limited partners and shareholders of the PSPC entity vote in favor of a transaction.
  • Fifth and finally, the target and the PSPC entity merge and complete the business combination. The last three steps demonstrate that the merger transaction between the listed PSPC entity and the private company is a de-PSPC transaction, which results in (1) the shareholders of the private company receiving shares of the entity SPAC and / or cash in return. and (2) the private company becoming a listed entity.

PBCs began to respond to the demand for mission-oriented companies in government procurement by engaging in PSPC IPOs and de-PSPC transactions. For example, according to ImpactAlpha, as of mid-March 2021, 31% of outstanding PSPCs (based on transaction value) are pursuing business strategies that are partially or fully aligned with sustainable investing strategies that include (1) social themes and environmental; (2) achieving impact; and (3) the integration of environmental, social and corporate governance (“ESG”). Professor Christopher Marquis, Samuel C. Johnson Professor in Global Sustainable Business at Cornell University, discusses the link between PSPCs and sustainability in his April 1, 2021. Forbes article, “New SPAC Sees Growing Market Opportunities for Stakeholder-Conscious Firms and Investors,” in which it argues that SPAC’s IPO and de-SPAC transaction processes can complement impact objectives of a PBC:

“The demand for ESG and its impact on public procurement is increasing in several ways. Public equity impact strategies experienced one of the highest growth rates across all asset classes from 2014 to 2018, and sustainability-focused funds posted record inflows in the first quarter of 2020, in particular to mitigate the risks associated with the Covid-19 pandemic … “

The PBCs are now beginning to lead this charge. For example, AppHarvest Inc. (“AppHarvest”), an agricultural technology company and PBC, engaged in the first de-SPAC transaction by a PBC when it went public through a merger with a public PBC entity. , Novus Capital Corp., on February 1, 2021. As a result of the transaction, AppHarvest received approximately $ 475 million in gross proceeds and over $ 435 million in unrestricted cash to fund its operations. Since the completion of the merger, AppHarvest’s price has reached a high of $ 38.21 and a low of $ 12.61. On April 19, 2021, AppHarvest shares entered oversold territory, reaching an RSI of 28.3.

Sustainable Development Acquisition I Corp. (“SDAC”), on the other hand, was the subject of an IPO by SPAC on February 9, 2021, becoming the first PBC SPAC entity. Sponsors of SDAC, Renewable Resources Group and Capricorn Investment Group plan to acquire companies responding to global challenges identified by the United Nations Sustainable Development Goals, including companies in the water, food sectors , agriculture, renewable energies and environmental resource management. PSPC’s IPO raised approximately $ 316 million upon closing of SDAC’s initial public offering of 31,625,000 units at a price of $ 10.00 per unit. Since the IPO of SPAC, the unit price of SDAC has reached a high of $ 11.45 and a low of $ 9.74.

As more and more PBCs go public through SPAC IPOs such as SDAC or de-SPAC transactions like AppHarvest, they must carefully address the associated risks. For example, a PBC that goes public through a PBC will need to carefully and clearly write its public documents to the SEC to describe not only the opportunities offered to the PBC’s business form, but also the risk factors. partners of the PBC, such as the potential shareholder. derivative litigation to uphold the social mission of the PBC. Also, as Tom Burton, Mintz Fellow and President of the Energy & Sustainability Practice Division, explained in “SPAC Chat Episode 3: Tracking Trends of the SPAC Surge” on the From the Edge: An Overview of the Innovation Economy podcast, “The SEC has indicated that it is reviewing this market and trying to determine if there should be additional disclosure requirements.”

Unsurprisingly, the SEC said on April 12, 2021 that it would begin reviewing the accounting principles that PSPCs used to classify their warrants. PSPCs have generally classified warrants issued to investors during the capital raising process as equity on the PSPC balance sheet. However, in certain circumstances, the SEC has stated that certain warrants should be classified as liabilities, which would require PSPC to periodically recognize changes in the value of the warrants. One possible negative impact of the SEC’s announcement is that the affected PSPCs would have to restate their financial results if the fluctuations are significant. Following the SEC statement, the the Wall Street newspaper warned that the frequency of PSPC transactions had started to decline because “[c]Regulators’ ritual comments appear to frighten some investors and new offers “in the April 16, 2021 article,” SPAC Hot Streak Mis on Ice by Regulatory Warnings “.

While there may be challenges and risks associated with PSPC transactions and the evolution of regulatory oversight, there are also exciting opportunities for PBCs that are made public through PSPCs. For example, PBCs allow companies to go public without as much public control as a traditional IPO, while also allowing PBCs to access capital faster for their operations or expansion. Additionally, PBCs that go public through a PSPC transaction can quickly reach a wide range of new investors and capital, as public investors are keen to support businesses with positive social and environmental impact. Additionally, PBCs might see increased publicity and awareness of their broader social mission. In this complex and exciting market, however, mission-oriented executives hoping to go public through a PSPC transaction or through the traditional IPO process should seek experienced advice and legal advice.

Footnotes

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.



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