What is SPARC?
SPARC stands for Special Purpose Acquisition Rights Company. Developed by billionaire investor Bill Ackman through his fund, Perishing Square Capital Management, L.P, SPARC, like traditional SPAC (Special Purpose Acquisition Company), is a shell company that aims to merge with a private company to ultimately become a publicly traded company. SPARC originated on September 29, 2023, when the U.S. Securities and Exchange Commission (SEC) approved a registration statement for Perishing Square SPARC Holdings, Ltd to raise a minimum of $1.5 billion from investors for the acquisition of a private company.
Unlike traditional SPACs, a SPARC doesn’t raise money from the public at the start. Instead, once the merger happens, SPARC offers special rights for free to investors who invested previously in Bill Ackman’s SPAC which has now been dissolved. With these rights, the holders will get an opportunity to buy shares in the new SPARC’s future business combination at the same price as SPARC’s sponsor.
How is SPARC Different from SPAC?
These two terms might appear similar one might confuse them to be interchangeable. However, though originating from the fundamentally same idea as the traditional SPAC, SPARC is different from SPAC in the following aspects-
Deal Visibility and Funding
- SPAC: raises capital through an initial public offering (IPO) without naming a specific company it plans to acquire. Instead, it only provides general information about the type of company it might target. After a potential acquisition is announced, SPAC investors have the option to either vote against the deal or redeem their shares.
- SPARC: does not raise public money initially. It will request money from investors only after it has secured and announced a deal to acquire a company. It has issued “acquisition rights” at no cost to investors from Ackman’s previous fund, allowing these investors the option to invest once the SPARC finalizes a deal.
Share of Sponsor
- SPAC: The sponsor usually gets a percentage of the SPAC’s shares at a low price, which can be profitable even if the merger doesn’t perform as expected.
- SPARC: sponsors earn their share through warrants that only become valuable if the company performs well post-merger.
Flexibility and Dilution
- SPAC: raises a fixed amount of money in its IPO and aims to merge with a company worth multiple times that amount. This can lead to dilution from issuing additional shares and warrants.
- SPARC: Can raise different amounts depending on the merger size. This results in fewer dilution risks since only the sponsor has warrants.
Opportunity Cost and Time
- SPAC: investors’ money is held in trust until the business looks for target. These investors bear the opportunity cost of not being able to invest their funds elsewhere, thus, SPAC is required to dissolve and return money to investors if it has failed to complete the deal after two or three years.
- SPARC: investors do not commit money until a deal is placed and finalised. SPARC has up to 10 years to find a target.
Underwriting Costs
- SPAC: incurs underwriting fees (around 5.5% of IPO proceeds) for the initial public offering.
- SPARC: avoids these fees because it gives out acquisition rights at zero cost, and not through an IPO.
Deal Approval
- SPAC: needs approval from SPAC shareholders to complete the merger. If shareholders don’t vote in favor, then they cannot proceed with the deal.
- SPARC: The sponsor is the only shareholder before the merger, so there is no risk of any failed vote.
Regulatory Requirements
- SPAC: Securities are listed on national exchanges, and follow standard regulations.
- SPARC: Rights are not listed on national exchanges and must comply with state-specific “Blue Sky” laws, which can add extra regulatory challenges.
SPARCs provide greater flexibility, potentially lower costs, and improved alignment between sponsors and investors. In contrast, SPACs adhere to a more conventional and regulated approach.
