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When structuring a business combination between a Special Purpose Acquisition Company (SPAC) and an operating business, the method of integration can significantly impact the listing process on Nasdaq. Typically, a SPAC acquires an operating business, and if the combined entity fails to meet Nasdaq’s initial listing requirements, Nasdaq may initiate delisting proceedings. The combined entity can appeal the delisting notice and remain listed during the appeal process, provided it demonstrates compliance with the listing requirements during the appeal period. If compliance is established, the appeal usually becomes moot, allowing the entity to retain its listing status.
Alternative Structuring Methods
In certain cases, SPACs may opt for a different structuring approach for their business combinations. Rather than the SPAC directly acquiring the operating business, the transaction may involve the target operating business acquiring the SPAC, or the formation of a new entity that consolidates both the SPAC and the target operating business. Examples of companies involved in such transactions include those where the new entity is formed to acquire both the SPAC and the target operating business, creating a new Registrant with the SEC.
Impact on Nasdaq Listing Process
For transactions where a new entity is created, the listing process involves several key considerations:
New Registrant Status - The newly formed entity will be a new Registrant with the SEC and will seek to initially list on Nasdaq at the time of the business combination. Unlike a straightforward SPAC acquisition, where the existing SPAC entity undergoes evaluation, Nasdaq must certify that the new entity meets all initial listing requirements before it can be listed.
Compliance with Initial Listing Requirements - Nasdaq requires the new entity to demonstrate compliance with all applicable initial listing requirements. This includes meeting financial, governance, and shareholder criteria. For example, if the newly formed entity includes companies like DraftKings Inc. (DKNG) or Virgin Galactic Holdings, Inc. (SPCE), it must fulfill Nasdaq’s requirements to secure its listing status.
Challenges with Round Lot Shareholders - One significant challenge in these transactions is verifying the number of round lot shareholders. Round lot shareholders are those who hold at least 100 shares of the company's stock. The process of determining the exact number of these shareholders can be complex, especially given the dynamics of shareholder redemptions that occur at the time of the business combination. For instance, SPAC shareholders have the option to redeem their shares for cash, which can complicate the verification process.
Potential Delisting - If the new entity does not meet Nasdaq’s initial listing requirements, it will not be listed. This outcome is a risk because Nasdaq’s certification is contingent upon the new entity meeting all the standards set for an initial listing. Companies like Altimeter Capital’s SPAC, which completed a business combination with the private enterprise, must demonstrate compliance with all listing criteria to avoid delisting.
Verification and Compliance
Nasdaq provides guidance on how it determines compliance with the minimum round lot shareholder requirement, as discussed in FAQ #1415. This FAQ outlines the procedures Nasdaq follows to assess whether the entity meets the necessary criteria, taking into account the challenges associated with shareholder numbers and redemption options.
In conclusion, structuring a SPAC business combination by creating a new Registrant rather than directly acquiring the operating business introduces additional complexities to the listing process. Nasdaq’s role in certifying the new entity’s compliance with initial listing requirements is crucial. Companies pursuing such structures must carefully manage the verification of shareholder numbers and ensure they meet all regulatory criteria to secure and maintain their listing status on Nasdaq.
