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A SPACtacular Case of Déjà vu

To our Valued Investors:

Less than a year ago, the internet chat rooms that focus on the parlor game of guessing which targets are in the sights of some of the larger SPACs lit up with speculation that an acquisition company called Forum Merger II Corporation (NASDAQ: FMCI) had its eyes on Impossible Foods, Inc.. FMCI had filed statements that it was focused on “a high-growth, plant-based food company with a broad portfolio of innovative products that are aligned with major food trends and sold through leading retailers and distributors across the United States”. The chatter slowed, though, when some observers pointed out that FMCI didn’t have the capital necessary to swallow a fish as large as Impossible Foods, currently valued at around $5 billion. Indeed, FMCI announced last June that they were acquiring another plant-based food play, namely, The Tattooed Chef. The story seized our attention at Iron Edge VC, due to our sharp focus on the most attractive late-stage privately held companies and the growing prominence of SPACs on the equities markets. Virgin Galactic (NYSE: SPCE) and DraftKings (NASDAQ: DKNG) were both brought to the public markets, quite recently, at a price of $10. Despite the many uncertainties surrounding much of 2020, they are trading around $32 and $50, respectively. These numbers are not lost on the big players who actually have the firepower to buy a company the size of Impossible Foods, or perhaps even larger. To tie it all together, in our general market observations we have noted the increase in SPAC activity — even to the point of the acronym creeping into civilian conversation, and generally being understood by many non-professional finance enthusiasts.

About 20% of the paragraph you just read was comprised of original material. The rest was lifted directly from an earlier Iron Edge VC newsletter titled Buying the Blank Check (June 23, 2020). We saw, at that time, an opportunity to focus on SPACS. We wished to broaden our community’s understanding of the concept and frame it of the context of one of our offerings. At the beginning of this week, CNBC reported in this article that online lending startup Social Finance, Inc., aka SoFi, might be in discussions about taking the SPAC route to go public. Alas, another opportunity. If what follows looks familiar, we thank you for attentively remembering our essay from six months ago. If it’s new to you, we hope you enjoy it, and perhaps draw from it some new knowledge you can show off at the next socially distant cocktail party you attend. Without further ado, on with the self-plagiarism.

Imagine a group of kids who have, collectively, an unusually advanced set of business skills. One has run a killer lemonade stand that racked up almost three thousand dollars over the course of one summer. One has a remarkably adept mastery of baseball cards and traded his way from a waterlogged 1988 Al Pedrique to a mint-condition 1952 Mickey Mantle. Yet another once organized a landscaping operation whereby all of the kids on the cul-de-sac were recruited to mow the biggest lawns in the neighborhood for 25% of the gross proceeds. Now, let’s say these three junior entrepreneurs join forces and finances. They want to move to the next level, and they pool their money. Their total is $7500 (because the second kid refuses to cash in the Mantle card for a couple of million bucks), but they wish to set a higher goal. They want to buy an existing business that’s worth $20,000, and manage and build upon the existing business’s foundation. It doesn’t matter what kind of business they buy, what counts is that the new venture will be a “big time” operation that they can improve. All they need is another $12,500.

The three amigos start asking everybody who will listen for small loans. Brothers, sisters, parents, aunts and uncles good-naturedly contribute modest portions of their own funds to what’s pitched to them as an “opportunity to invest in talent”. Word starts to spread, and suddenly people are seeking out the little tycoons, eager to get a piece of whatever mysterious enterprise is taking shape. The poor little jamokes from the cul-de-sac seem particularly keen to find an easier way to fill up their piggy banks, so they give back their meager wages for the promise of earning great returns from this brand-new company that… does something. The specifics of the newly acquired company’s business operations are mostly irrelevant. Whether the partnership decides to sell lemonade, mow lawns, or manufacture do-it-yourself brain surgery kits, their track record suggests that they will succeed.

What those miniature moguls unwittingly created is known as a Special Purpose Acquisition Company, or a SPAC. The concept of forming a corporation that serves no specific business purpose, with the intention of filling in that very meaningful blank, has been around since the early 1990’s. The earliest SPACs arose as a more stable evolution of the leveraged buyout, and they tended to focus on specific industries like healthcare and telecommunications. Their appeal then, as it is now, was grounded in the reputation of the SPAC’s team as having a firmly established set of business skills, economic aptitude, and profit generation. The specifics of what the company makes, or what services it provides, are not part of the equation. These factors are almost entirely unknown during the investment phase.

When a SPAC corporation, also known for obvious reasons as a “blank check company”, is formed, the first step is to file an S-1 form with the Securities and Exchange Commission. Every publicly traded company in your portfolio — General Electric, Disney, Palantir — once had to take this step. The S-1 is essentially a formal declaration of a company’s intention to make its shares available for public trading. Unlike applying for a fly-fishing permit in the Berkshires, the S-1 process is an expensive and extremely time-consuming one with mountains of paperwork. Surprisingly, though, the filing does not require details about how the company makes money. This is good news for SPAC filers, as it spares them the embarrassment of having to type “TBD” into that space. After the filing, the SPAC organizers bounce around the globe sharing their PowerPoints with potential investors. The proceeds of this road show are placed into an interest-bearing, FDIC-insured escrow account. When the balance in that account attains the appropriate level, the SPAC team finally announces the target company, which is always privately held. This is when the cool part kicks in. The investors in the SPAC are allowed the opportunity to approve or reject the acquisition. If the managers want to buy a global chain of specialty shoelace retailers, the investors can give it the “thumbs down”. If, on the other hand, the majority of stakeholders like a deal, it goes forward, with funds returned to whatever dissenters may exist. From that point, the SPAC applies for a fresh stock ticker symbol and the newly acquired (and until recently, private) company is inserted into the pre-approved, S-1 compliant shell corporation, ready for public trading.

Again, SPACs have been around for decades. Recently, though, they have had a resurgence that elevated their profile and their economics. 2019 set new records for the practice, with nearly $14 billion in SPAC deals. The highest-profile stories revolved around DraftKings and Virgin Galactic. In the latter’s case, Richard Branson sold 49% of his space tourism company to a blank check company called Social Capital Hedosophia Holdings Corporation at a valuation of $1.5 billion. The cash infusion enabled Virgin to fund the full commercialization of its SpaceShipTwo suborbital vehicle. More important, it provided them with a significant shortcut to public listing, sparing the company, its lawyers, and its accountants from the aforementioned months-long ordeal of filing an S-1. As for Social Capital, the premium paid for Virgin was worth it. The company is thriving in the public markets, and its market capitalization currently stands at about $7.8 billion, representing a 420% boost. SPAC activity, in general, has attracted the attention of big-name underwriters like Goldman Sachs and Deutsche Bank, and it has become something of a high-stakes hobby for ultra-rich, semi-retired senior executives who fancy short-term investment opportunities.

SPAC momentum continues to build. With Monday’s SoFi story, it is hitting never-before-seen levels. As of this date, though, no IPO, direct listing, or SPAC has delivered Social Finance shares to the public markets. Today, you cannot log on to your Ameritrade account and get in on this action. On the plus side, the masses have not yet had the opportunity to dramatically elevate the company’s shares. Your friends at Iron Edge VC can usher you through the front door, though, and provide you with access to this exciting and promising company. We have repeatedly talked about SoFi in these communications (even last week), and the recent attention in the financial news outlets is already inspiring some very convincing price action. Clearly, the secret is out, and our supply is finite. If you would like to learn more, or if you know somebody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.

As always, shares are available on a first come, first served basis.

All Our Best,

Paul Maguire, Managing Partner and The Iron Edge Team

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Paul Maguire

Founder And Managing Partner