We finally got a new amendment to Bill Ackman’s previously filed Pershing Square SPARC Holdings, allowing us to see the latest iteration of his “new and improved” SPARC product.

If you recall, the first iteration of the SPARC was debuted last summer when Ackman announced his deal with Universal Music Group (“UMG”).  At that time, the intention was to acquire a 10% stake in UMG for an approximate enterprise value of $42.4 billion, plus, it would throw off a “RemainCo” and a “SPARC”, or “Special Purpose Acquisition Rights Company”.

However, subsequent to that announcement, Ackman and Pershing Square Tontine Holdings (PSTH) terminated the deal with UMG due to the SEC’s concerns the transaction would violate rules governing the Investment Company Act of 1940.  Despite already terminating the deal with UMG, PSTH was then sued by a former SEC commissioner and a law school professor alleging that PSTH did, in fact, act as an investment company.  The lawsuit seemed like, at best, a real stretch at the time, but it resulted in the galvanization of the law community whereby 49 law firms (eventually 55+), united to push back on the litigation. To say there has been “drama” around PSTH would be a wild understatement.

But Ackman pushed on and filed a new S-1 back in November of 2021, for Pershing Square SPARC Holdings, Ltd., a new and separate vehicle from PSTH, but also linked in that PSTH holders would be distributed SPARC warrants.  However, at that time, Ackman effectively stated that it would be almost impossible for him to complete a SPAC transaction given the current situation with the lawsuit.  Instead, however, he proposed a solution via his previously disclosed SPARC structure.  Furthermore, he stated that if the SPARC structure is approved, his intention would be to issue SPARC warrants in the event of either a PSTH business combination or a liquidation.

The first S-1 was filed nearly 7 months ago and PSTH is now quickly approaching it’s completion deadline of July 24, 2022. However, PSTH has technically already qualified for a six month extension since they previously announced a deal with UMG, but they don’t necessarily have to take it. PSTH could opt to liquidate instead. Nonetheless, there is still the possibility Ackman could announce a new combination and still have time to close by January 24, 2023.

However, today’s amendment to the SPARC did make some notable changes. Namely, rather than list on the NYSE, it now intends to list on the OTCQX. The reason why is due to NYSE listing rules, which would need to be changed in order for the SPARC to be listed there and any NYSE listing rule changes are subject to SEC approval. And if you recall, Ackman withdrew the proposed amendment to the New York Stock Exchanges listing rules back in April, noting that it was unlikely that the SEC would approve it.

Which bring us to today with an amendment to the originally filed SPARC S-1. Most of the changes in the S-1 were of the mechanical sort with the total number of SPARC Warrants to be issued changing from 244,444,444 to purchase ONE share of Common Stock at a minimum exercise price of $10.00, to 122,222,222 SPARC Warrants to purchase TWO shares at a minimum exercise price of $10.00 per share. At the end of the day, it’s the same amount of shares if all are exercised, but less Warrants issued upfront.

Furthermore, some of the language has been modified such as the SPAR Holder Payment Period.  In the first S-1 it read as “5 calendar days”, but has now been changed to “5 business days”. Same for the Company Decision Period – instead of 10 calendar days, it’s now 10 business days. However, the mechanics to the SPARC structure are still the same in that there are essentially the same steps and procedures that were outlined in the first S-1. Those are:

1. Search Period: warrants trade, but are not exercisable
2. Disclosure Period: a definitive agreement with a selling company is signed and announced along with a “Final Exercise Price” for the SPARC warrants. Keep in mind that the warrants are still not exercisable yet.
3. Election Period – 20 business days: holders have 20 business days from the mailing of the post-effective amendment to elect to exercise their SPARs. It’s important to note here that warrant holders are still not able to exercise. Additionally, once you have submitted your election, your warrants are no longer eligible to trade. However, unelected warrants will continue to trade up until the end of the 20 day Election Period.
4. Company Decision Period – up to 10 business days: no later than 10 business days following the Election Period, the company will announce whether they will be proceeding with the combination. If they don’t proceed (similar to when a SPAC deal does not proceed) all SPAR elections are cancelled and the warrants are returned to holder and Ackman and the SPARC can search for a new combination. If they company does proceed, warrant holders proceed to the SPAR Holder Payment Period
5. SPAR Holder Payment Period – 5 business days: this is the time period where SPAR holders that elected to exercise must make their payment. Again, there is no still no trading of the warrants or of the shares underlying the SPARs yet.
6. Closing: At the same time the deal closes, the public shares underlying the SPARs will be issued and being trading and all unexercised SPARs expire.

But…Ackman intends to keep the ball rolling by issuing a Tontine pool of new SPARs (SPARC II Tontine SPARS) to the original SPAR I holders that exercised.  This will be a new pool of 122,222,222 SPAR II warrants that will be distributed pro rata to exercisers.  So, for example, if only half of the original 122,222,222 SPAR holders exercised in the first announced combination, those 61,111,111 warrant holders will receive twice the amount in the new SPARC II vehicle. The spoils go to the exercisers.

Other changes noted are that the sponsors are purchasing their Sponsor Shares for an increased purchase price of $1,971,880, as opposed to the original amount$236,600.  Both purchases were done at $10.00, so the number of shares purchased has increased from 23,660 to 197,188.

Furthermore, the sponsors intend to make an initial investment of $30.0 million to fund their working capital by purchasing Sponsor Preferred Shares, of which $5,000,001 will be held in a custodial account and earn interest via short-term U.S. Treasury obligations and/or money market funds, similar to a SPAC. After deducting initial offering expenses, the SPARC will have $23.1 million of working capital at its disposal. And while this $30.0 million is not technically “at-risk” in the SPAC sense where it goes to shareholders in the event of a liquidation, Ackman makes the argument that $30 million is a substantial enough sunk cost that the team will be motivated to complete a successful combination.

Additionally, on the topic of motivation, Ackman also notes that the SPARC Sponsors do not receive any Promote unless they complete a deal (which will be equivalent to 4.95% of the post-combination company, as opposed to a SPAC where sponsors are issued a 20% promote upfront. However, this is a little misleading in that most sponsor teams own less than 4.95% when all is said and done and negotiated.  But he does have a point in that the SPARC sponsors will not receive any promote at all unless the share price is performing 20% above the Final Exercise of SPAR holders. It’s not enough to just close a deal, but the company has to perform.

Lastly, Ackman made note in the first S-1 of how costly and time-consuming a traditional IPO process can be as opposed to both a SPAC or SPARC process, but it’s worth mentioning again in light of the current SEC proposal to revise SPAC rules. Below is from the current S-1 filing:

We believe our company also presents several advantages to conducting an IPO. The nature of the IPO process—whereby the pricing, the ultimate terms of the offering, and even whether or not the offering can be completed remain unknown until the day of pricing of the offering—makes the IPO process inherently uncertain and risky. We believe that this uncertainty and risk, along with the upfront expenses and significant time required to pursue an IPO can discourage many large, private companies from attempting to execute public offerings.

Becoming “IPO-ready” can be time-consuming and costly for a company, even before it makes its first public filing. For example, a company may have detailed financial statements, but not in the form required for public filings with the SEC. The preparation and auditing of these financial statements may take several months. In a negotiated transaction, however, many of the steps to becoming “public company ready” can be carried out in parallel with the deal process, provided that sufficiently detailed and accurate information is available for due diligence.

In addition, during the IPO process, a private company faces the risk of negative developments and unfavorable market conditions that can significantly reduce the proceeds of the offering below the amount sought, or cause the offering to be delayed or even abandoned. The amount of capital and the valuation a company will receive in its IPO may be uncertain up until the day of pricing. Companies face a risk of underpricing, as reflected in the immediate post-IPO “pop” in stock price many companies experience, and a risk of overpricing that results in the IPO being resized or repriced, or the stock trading downwards. Companies have an incentive to avoid the negative market signal sent by an unsuccessful IPO, which may result in pricing the offering lower, and potentially foregoing a larger capital raise and/or higher valuation.

The IPO process also limits the information a private company can provide to its investors. In addition to the “quiet period,” in which companies are restricted from certain communications with potential investors and may have limited ability to respond to unfavorable coverage (or to convey positive developments), a company may be unable or reluctant to share certain information with public investors. In our due diligence and negotiation process, under a non-disclosure agreement, we may be able to obtain certain confidential or proprietary information or other detailed information of particular relevance to our valuation process, and would be able to engage with the company’s management to develop a deeper understanding of its performance and plans. Through a negotiated transaction with our company, a business combination partner could obtain not only the certainty of a mutually agreed valuation, but also a potentially more favorable valuation that reflects a more comprehensive evaluation of its business than it may be able to obtain through the IPO process.

Ackman highlights the flaws of the traditional IPO process to demonstrate why he believes a SPARC process would be beneficial to a company seeking to go public, but it also highlights why SPACs became popular in the first place – the traditional IPO process can be cumbersome.

Ultimately, Ackman is trying to further iterate on the SPAC vehicle by trying to create an “inverse SPAC” of sorts, i.e., the cash available to the company isn’t based on how many shareholders redeem, but rather how many shareholders pay-in at exercise. This is a simplistic way of looking at it and glides over things like forward purchases and PIPEs, but it’s Ackman’s premise at its core. But in the end, it’s still very much SPAC-like in that it avoids the pitfalls of a traditional IPO.

The real question is, will the SEC approve this vehicle and will they approve it ahead of PSTH’s July 24 liquidation deadline. Interestingly, this shouldn’t trip up any of the Investment Company Act rules that are currently at issue in the SEC proposal since there isn’t any investor money being invested. Technically, $5,000,001 will be held in a custodial account, but that’s the sponsors’ money, not investors.  And there isn’t an issue (at least that I can tell) of underwriter liability since this is not an underwritten offering, simply a distribution of warrants.  And by listing on the OTCQX, they do not need to revise the NYSE listing rules. Having said that, the SEC has not been amenable to innovation and particularly in regards to SPACs or “SPAC-like” vehicles.

The only other item that might be an issue for companies is the fact that they will need to trade on the OTCQX for one year post-closing before they can uplist. If Ackman is big game hunting, it might be a challenging task convincing a company they need to wait that long to be “seasoned” before trading on the NYSE or Nasdaq.

Regardless, we’ll have to wait and watch for any subsequent filings for any further changes. More importantly, we’ll need to wait and see if the SEC keeps this in review or approves it ahead of PSTH’s liquidation date.