Pershing Square Tontine has had more twists and turns than a garden hose…

Last night, Bill Ackman posted a letter to the Pershing Square Tontine website laying out the current situation with the recently filed civil suit and how it affects the SPAC.  More importantly, Ackman also detailed his plans to remedy the situation…with a SPARC.

However, as a refresher Pershing Square Tontine Holdings is currently facing a suit brought by a former SEC commissioner and a law school professor alleging that  Pershing Square Tontine Holdings (NYSE: PSTH), acted as an investment company, violating rules which require these deals to adhere to the Investment Company Act of 1940 (you can read more about the specifics HERE). As a result of that suit, Ackman notes:

“While we believe the lawsuit is meritless, the nature of the suit and our legal system make it unlikely that it can be resolved in the short term. Even if the case were dismissed expeditiously, the plaintiff can then appeal. As a result, the mere existence of the litigation may deter potential merger partners from working with PSTH on a transaction until the lawsuit is finally resolved.”

“PSTH has about 11 months remaining to enter into a letter of intent with a transaction counterparty for its initial business combination, and six additional months to close that transaction. This period may be extended by up to six months by a vote of PSTH shareholders. While we have been working diligently to identify and close a transaction, and we have begun discussions with potential merger candidates, our ability to complete a transaction in the required time frame has been impaired by the lawsuit.”

Essentially, he says it will be almost impossible for him to complete a SPAC transaction given the current situation.  Instead, however, he proposes a solution via his previously disclosed SPARC structure, which is still working on getting approval from the SEC. If the SPARC structure is approved, Ackman’s intention is to liquidate PSTH’s trust and return cash to shareholders in addition to giving them SPARC warrants.

Importantly, one of the key difference between a SPAC and a SPARC is that investors do not need to “pay for the security” upfront.  You only opt-in by exercising the SPARC warrant AFTER a deal has been announced and you’ve had a chance to look at the transaction. Additionally, while SPACs are usually given 18-24 months to find a combination, there is no such time horizon placed on the SPARC. However, since investors are not being asked to invest until after a deal is announced, there is no “time value” lost on your investment.

So how will this all work with PSTH? 

Again, this assumes the SPARC structure is approved and it’s important to note that the SEC has not yet given their approval.

First, PSTH intends to liquidate the trust and return the $4 billion of cash currently held in trust to shareholders.

Second, the SPARC would then issue one SPARC Distributable Warrant for each PSTH Distributable Warrant. It’s important to remember here that in the original PSTH structure, only shareholders that do not redeem at vote are entitled to receive the “Tontine Distributable Warrant”.  If you recall, the PSTH unit held 1 share + 1/9 warrant.  The “Distributable warrants” were separate and were are based on a tontine pool that was carved up and given to remaining shareholders.  In this case, since the entire trust is redeemed, all shareholders will be given Distributable SPARC warrant. However, you must own the share. It appears the original 1/9 “Redeemable Warrant” will cease to exist. Furthermore, the Distributable Warrants will have a $23 exercise price and a five year term, matching PSTH’s original structure.

Third, shareholders in PSTH will also receive a separate SPARC warrant, which will entitle shareholders to invest in the future announced business combination.  Or, you can sell them into the market since they intend to have them trade on the NYSE. However….

Fourth, the listing of SPARC warrants on the NYSE is going to require a listing rule change which will also be subject to SEC approval.  Ackman notes that they are currently pursuing  that  change with the NYSE, which you can find here https://www.nyse.com/regulation/rulefilings 

So, to review:  PSTH is liquidated, 200 million SPARC warrants are issued ($4 billion original trust/$20) and 22.22 million Distributable SPARC warrants will be issued to PSTH shareholders.

The bottom line is, either way there is most likely a liquidation in the future for PSTH.  Whether that’s because the lawsuit has tied up the deal in the court system, forcing it to liquidate, or, because the SPARC structure has been approved.  However, at least with the liquidation associated with the SPARC, you’ll at least have a new security (that trades) and the possibility of a future deal to review and possibly invest in.

Nonetheless, there are still numerous questions that need to be answered.  For example, what sort of process will the SPARC acquired company go through in order to get public?  It can’t just “list” automatically upon exercise of the SPARC warrants – there will need to be some sort of SEC review process of the company.  So will it file an S-1 registration statement? Or an S-3 for the shares underlying the warrants? If so, filing a registration statement seems awfully similar to a traditional IPO process so how would it be any different?

The SPARC is still an interesting and novel idea, but we’ll probably need to wait a bit longer to get some of these questions answered.