The SPAC Phenomena as an Introduction Channel of Israeli FinTechs to the World
Special Purpose Acquisition Companies (SPACs) have been around for decades, but in recent years they have raised a record amount of IPO money and attracted big-name underwriters, investors, and even celebrities. To understand the magnitude of this boom, SPACs have raised more than $88billion from March 2020 to March 2021 while only raising $13.6billion in 2019.
One reason SPACs are so popular is because they give the acquired company the ability to go public much faster than the exhausting IPO process which also carries heavy costs and no guarantee of success. Through a SPAC, a company can get more certainty on its valuation and could be public in a few months term from start to finish, assuming their house is in order, compared to an IPO or Direct Listing which could take over six months.
While SPACs have gotten a lot of attention from investors, regulators are now watching too. The Securities and Exchange Commission in the USA (SEC) is increasing surveillance of SPACs who issue warrants to raise capital and in the latest string of warnings issued by the SEC, the regulating body stated that some of the blank-check firms may have failed to properly account for warrants sold or given to investors on their balance sheets.
SPACs have historically listed warrants as equities, but the SEC noted that most warrants issued in connection with a SPAC transaction should be classified as liabilities. This preservative approach from the SEC will curb the over-valuation of these companies and provide more detailed budget sheets. These warnings also impact new SPAC offerings in the same manner, causing a massive slowdown of the number of SPACs entering the market.
Israeli Fintech Acquisitions
In Israel, the fintech industry is taking advantage of the SPAC phenomenon as several companies finalize their plans to get acquired. We have taken the liberty of compiling the most exciting fintech acquisitions coming out of Israel with a SPAC model:
Payoneer, which offers a cross-border payment platform that empowers businesses and freelancers to pay and get paid globally as easily as they do locally, went public via a SPAC led by Bancorp. The merger with the SPAC, FTAC Olympus Acquisition Corp., values Payoneer at $3.3billion and opens up a range of opportunities for them to serve numerous clients in additional regions.
Another SPAC case in the Israeli fintech market is EToro, the multi-asset investing and trading platform, who announced it will go public via a merger with SPAC FinTech Acquisition Corp. V in a massive $10.4billion deal. EToro offers its users investment options in both stocks, cryptocurrencies, and social copy trading. Once the acquisition closes in the third quarter, the combined company will operate as EToro Group Ltd. and is expected to be listed on the NASDAQ exchange.
Pagaya, a powerful fintech engine that uses deep learning to formulate efficient credit evaluations and more accurate credit assessments, is rumoured to be seeking a SPAC merger at an $8billion valuation. 5Pagaya is in talks with several SPACs regarding a merger led by investment bank JP Morgan. The board of directors of the fintech firm has yet to make a final decision on the matter but is expected to make one soon.
Another example is Fundbox, a data-based credit startup that enables small and medium-sized businesses to quickly receive credit lines based on future invoices. They are also in negotiations to merge with a SPAC to raise $300 million, placing it at a $1.5billion valuation.
Lastly, there is Hippo, an Insurtech company that analyses data from building records, satellite imagery, and smart home devices to enable customers to instantly qualify for coverage. Hippo is attempting to go public through SPAC Reinvent Technology Partners in a combined valuation of more than $5billion.
Israeli ‘SPAC Target Companies’
A SPAC deal is a cross border transaction involving different jurisdictions and possessing unique challenges. To gain a better understanding of the optimal deal structure for Israeli ‘SPAC Target Companies’, we had an exciting discussion with Hadas Mishli from KPMG Israel’s Global Tax Technology Department who enlightened us on different aspects of SPAC deals.
According to Hadas, one of the main challenges in executing a SPAC deal is the structure of the transaction. It should be analyzed as early as possible in order to minimize future delays caused by opposing interests of the different participants. The execution of the transaction, whether through a purchase of shares, share exchange or a reverse triangular merger, may create a significant tax liability for both the shareholders of the target company as well as the SPAC, which can be a critical driving force for business decisions.
Although it is common that in certain jurisdictions the SPAC is the entity purchasing the target company, the simplest structure from an Israeli tax standpoint would be for the Israeli company to remain the parent company while the SPAC becomes its subsidiary, which can be achieved by a reverse triangular merger.
From an Israeli perspective, as the Israeli entity’s shareholders maintain their holdings of the target company, this restructuring process should not lead to immediate Israeli tax implications.
A US Perspective
Hadas added that from a US perspective, the transaction would need to qualify as a tax-free reorganization by US domestic tax law in order to avoid triggering an immediate tax event for the SPAC’s shareholders. As such, the SEC often requires a company to provide further documentation if there is a risk of the restructuring not qualifying as a tax-free reorganization.
The SEC’s core mission is to protect the investing public and the integrity of financial markets. The security laws being emphasized work to protect investors, such as the surge of inexperienced retail investors, who might be tempted by misleading projections, celebrity endorsements, and overly inflated valuations. Although the new SPAC guidelines by the SEC might slow the current SPAC boom, it serves most of the interests of investors, and looks like the SPAC’s alternative route of taking a company public is here to stay. We will stay tuned as we roll into the 2nd half of 2021 to see which of the above mentioned Israeli based fintechs fulfilled their aspirations by using this path and who are the next candidates to declare on similar processes.
*The article was published by The FinTech Times