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June 24, 2019
Welcome to the SPAC Research weekly newsletter.

Redemptions & Post-Combination Float
Last week, MTech Acquisition Corp., now trading as Akerna Corp. (NASDAQ: KERN) and Jensyn Acquisition Corp., now trading as The Peck Company (NASDAQ: PECK), closed business combinations. Both companies experienced high public shareholder redemptions and both experienced rapid price spikes that caught many by surprise: KERN traded as high as $80 on light volume in the aftermarket on Wednesday 6/19/2019 and PECK traded over $30 in the premarket on Thursday 6/20/2019, its first day post-closing.

So what happened? Well, in the case of MTech, you have a company with cannabis in its business description and a 1.3mm share float. The sponsors anticipated enough redemptions (for $10.24 per share in cash) that they secured a 900k share PIPE for $9.2mm to ensure they would get to closing (and gave up approximately 100k founder shares to the PIPE investors for their commitment). The PIPE shares aren't registered yet, the founder & seller shares are locked up, and the shares underlying the warrants are registered but not exercisable for 30 days. Cannabis likely means high retail participation, both among the shareholders who decided not to redeem for cash and those who have flooded in on positive sentiment. And on Twitter this week, there was no shortage of nonsensical hashtagging and bragging about the latest pot stock du jour. Supply: meet demand.

In the case of Jensyn, the target is a small company - a solar EPC in the northeastern United States with just under $16mm in revenue in 2018. Jensyn hasn't released a redemption count yet, but their recent investor presentation assumed 100% of public shares would be converted into cash. That would have effectively left only 390,000 shares underlying the public rights sold in units at IPO for the company's freely traded float. When the company announced the deal was approved Wednesday after hours, a raft of tweets like the one below started flying around, essentially drafting off of Akerna's rally:

Jensyn's common stock traded up to $17 in the post-market, likely on retail order flow. The mechanics of short selling always leave the possibility of having your locates bought in when the trade settles (on date T+2), and anybody who tried to hedge a position in Jensyn rights by shorting common shares likely had a white-knuckle moment if they were still watching in the after-hours session.

So what's the lesson here? For starters, low float situations create a wide range of possible outcomes, including rapid price appreciation. NASDAQ can't be thrilled at watching low float stocks trade up hundreds of percent on light volume. As discussed in our newsletter a few months ago, NASDAQ is looking to exclude restricted shares (like founder or seller shares under lock-up) from the 1mm share initial listing requirement, a rule change that still appears to be open for public comment.

As for trying to anticipate if or when this kind of thing will happen again in the future: it's at least possible to anticipate when a SPAC might close a deal with an extremely low float. But it's tough to get ahead of it. Even if one correctly anticipates a narrow enough funnel of supply, there's always the risk that the exchange will step in and halt something that's getting out of hand.

Nevertheless, we went back through last week's unit structure tiers - units that contained 1/3 warrant, units that contained 1/2 warrant, units that contained a whole warrant, and units that contained rights (or units that contained rights and warrants) and calculated the aggregate percentage of public shares that were redeemed within each of those groups.
Approximately 46% of all public shares have been redeemed by the 56 SPACs from 2015 or later that have either completed a business combination or liquidated. This includes 14 SPACs that closed their deals with less than 1mm public shares remaining, as well as 14 SPACs that suffered public redemptions of less than 10%.

News From the Past Week

IPOs and S-1's
  • South Mountain Merger Corp. (SMMC) raised $225mm in an upsized IPO for an acquisition in fintech. South Mountain is led by Charles Bernicker, former advisor to various SPACs that have shopped in the fintech space and former CFO of CardConnect, which was acquired by FinTech Acquisition I. Citigroup was sole book-runner on the deal in the bank's first SPAC IPO of 2019.
  • Tuscan Holdings Corp. II (THCA) filed to raise $125mm for an acquisition in the cannabis space. THCA will be led by Stephen Vogel, who has ample SPAC experience as former chairman of Forum Merger Corp., current president of Twelve Seas Investment Corp., current Chairman & CEO of Tuscan Holdings I, and current president, CFO & director of Subversive Capital Acquisition Corp., a British Columbia-based SPAC intending to raise $500mm and list on the Neo Exchange in Canada. Tuscan I raised $276mm in an upsized IPO just three months ago, and it appears Vogel and a handful of team members from Tuscan I will try to capitalize on cannabis related market enthusiasm to raise a second, smaller SPAC. We can't remember any precedent for a team raising a sequel SPAC without having a business combination on the table, so this one will be interesting to watch, especially as Vogel juggles his various management positions across four active SPACs.
  • SC Health Corp. (SCH) filed to raise $150mm for an acquisition in healthcare in the Asia Pacific region. SCH is based in Singapore and will be chaired by David Sin, the founder of SINCap, a multi-asset investment group focused on real estate and private investments across Asia. Mr. Sin also co-founded FHC, a leading vertically integrated healthcare platform in the Asia Pacific region. Credit Suisse is sole book-runner.

Possible Backstop and Extension
  • Black Ridge Acquisition Corp. (BRAC) set a meeting date earlier this month of Friday, 6/28/2019 to approve its business combination to form Allied Esports. On Monday 6/17/2019, the company filed a preliminary proxy for a charter extension meeting, in case it can't close the transaction before the current deadline of 7/10/2019. Then on Wednesday 6/19/2019, BRAC announced a term sheet for a strategic investment by TV Azteca, a top sports TV network in Mexico. If TV Azteca completes its due diligence and the two parties execute a definitive agreement, it is anticipated that TV Azteca will purchase $5mm worth of BRAC common stock and the two parties will enter into a strategic partnership. The deal carries a minimum cash condition of $80mm, though that can be waived by Ourgame International Holdings, the present owner of the target.
Charter Extensions
  • Modern Media Acquisition Corp. (MMDM) held a charter extension meeting on 6/14/19 at which shareholders approved an extension through 9/17/2019 and redeemed approximately 13.3mm public shares, leaving 1.4mm public shares outstanding and just over $14mm in the trust account. At this point, in order to close its deal, the company is headed toward raising external financing via private placement or toward the target (Akazoo Limited) waiving the $60mm minimum cash condition associated with the deal - or both.
  • Pensare Acquisition Corp. (WRLS) announced the results of its mid-extension redemption offer, with 18.3mm public shares redeeming for cash. Approximately $63mm remains in trust. The sponsor had committed to contribute $0.033 per share, per month to the trust account, up to $200,000 (which represents $0.033 per month for just over 6mm shares). 6,060,038 public shares now remain outstanding, almost exactly the number the company seemed to be targeting.
SPACs in the News
  • Here's an article from the WSJ about the NYSE's proposal to reduce the minimum round lot shareholder rule from 300 to 100, which the SEC rejected. The article implies that SPACs may suffer as a result, although we would like to point out that SPACs have raised capital at an impressive clip these past few years without requiring assistance from any reduction to the minimum public holder count.
  • The SEC has charged Ability Inc., an Israel-based tech company, and two of its executives with defrauding former shareholders of Cambridge Capital Acquisition Corp., the SPAC it merged with in December 2015. The complaint alleges that material misrepresentations were made about Ability's business and order backlog, and that Cambridge did not conduct third-party due diligence on key pieces of Ability's business. The SEC also reached an administrative settlement with Benjamin Gordon, the former CEO of Cambridge Capital, under which he will pay a $100,000 civil penalty and face a one year ban from working in the securities or investment industries.
Disclosures: Site administrators are long BROGW, BROGR, BRACR, THCB, THCBW, MMDMW, MMDMR, WRLSR and may trade in or out of positions in these or other SPAC securities at any time. Nothing on is a solicitation to buy or sell any investment.