On September 29, 2023, the U.S. Securities and Exchange Commission (SEC) declared effective a registration statement for Pershing Square SPARC Holdings, Ltd., which is contemplating a unique variation on the traditional special purpose acquisition company (SPAC) structure. This variation, called a SPARC—or special purpose acquisition rights company—was spearheaded by billionaire investor Bill Ackman through his investment fund, Pershing Square Capital Management, L.P., and was designed to address several pain points for SPACs, which have lost popularity after frenzied activities in 2020 and 2021.
Ackman’s SPAC, Pershing Square Tontine Holdings, previously gained notoriety in 2020 as the largest ever SPAC with $4 billion raised, but that capital was ultimately returned to investors in 2022 after the SPAC failed to consummate a business combination within the prescribed time period.
What Is a SPARC?
Like a traditional SPAC, a SPARC is a shell company that is seeking to identify and combine with a private company, with the post-combination entity being a capitalized public company. Unlike a traditional SPAC, a SPARC does not raise any public capital at its onset.
More specifically, pursuant to its effective registration statement, the Pershing Square SPARC is distributing special purpose acquisition rights at no cost to former investors in Ackman’s dissolved SPAC. These acquisition rights will provide the holder, among other things, the opportunity to purchase securities in connection with a future business combination by the SPARC at the same price as the SPARC sponsor.
Although the SPARC retains the fundamental nature of a traditional SPAC as an acquisition vehicle, it also departs from a SPAC structure in some notable ways:
Initial Takeaways
Although the SPARC structure appears to solve many the issues for investors in SPAC IPOs, it is a novel and unique structure, so the investment community will need time to fully digest its benefits and drawbacks, which will likely depend on the success of the Pershing Square SPARC. Furthermore, the terms of the Pershing Square SPARC may differ materially from future SPARCs. The time required for potential market acceptance and the establishment of standard market terms will likely be extended due to the precipitous drop in investor interest in traditional SPACs and the uncertainty regarding the timing and scope of the final SEC rules for SPACs, including how those rules may apply to the SPARC structure.
Additionally, while the Pershing Square SPARC structure provides some assurances as to the minimum amount of post-closing cash, many of the issues that target companies face when considering a business combination with a traditional SPAC will continue to be issues when considering a combination with a SPARC. Those issues include limited certainty on the amount of post-closing cash, competing interests in setting the target’s pre-combination valuation, potential dilution from the sponsor warrants, uncertainty as to the timing and likelihood of closing the business combination from other closing conditions (e.g., the scope and duration of SEC review), limited post-closing public float prior to the target company’s lock-up expiring and onerous post-closing disclosure requirements.
For any questions or more information on these or any related matters, please contact your regular Wilson Sonsini Goodrich & Rosati contact or any member of the firm’s capital markets practice.