In the sixth series, the structure of ABC was discussed. It is straightforward. The five directors and officers (John, Peter, Ben, James, and Paul) are the Sponsors, each of them contributed $5,000 to the start-up fund. Collectively, they received 7,187,500 common shares (“Class B” shares) at $0.003478 per share. The Class B shares will be automatically converted into Class A shares, on a one-for-one basis. Robin, the institutional investor also a Sponsor, provided an interest-free loan for the working capital and purchased 700,000 Class A common shares at a price of $10.00 per share under a private placement agreement. There is no disclosure in the prospectus that the directors and officers of ABC were remunerated or compensated.
Now, let’s say the IPO 25,000,000 shares ($250,000,000) sold. The five directors and officers will enjoy a paper profit 6,250,000 common shares x $10.00 per share = $62,500,000 – $25,000 = $62,475,000 (or $12,495,000 per person). They agreed not to sell their Class A shares one year later, a risk they have to take despite the implied value per share after the offering is $7.55. Robin has no paper profit and did not enjoy any interest on the loan Robin provided to ABC. Is this what the Sponsors want?
There are three main players in ABC SPAC. The Founder Members, Robin, and the public investors. In applying the economic theory of rationality, the Founder Members could possibly revise the structure by increasing the IPO amount to $500,000,000 (or 50,000,000 common shares) with an offering price of $10.00 per share. For the same amount of $25,000 as the contribution for the initial start-up fund, the Funder Members will now receive 14,375,000 Class B shares, convertible to Class A shares which are below the 20% benchmark. The revised bottom line paper profit will be 14,375,000 common shares – 1,825,000 forfeiture common shares = 12,500,000 common shares or 2,875,000 common shares per each Founder Member. Collectively, 12,500,000 common shares x $10.00 per share = $125,000,000 – $25,000 = $124,975,000 (or $24,995,000 per person). The paper profit is double. The issuance of 14,375,000 Class B shares for $25,000 is $0.0017 per share. The par value per share of ABC is $0.001.
For ABC, there is nothing more reward for the Founder Members unless the issuance of founder warrants created to enable the Founder Members to subscribe to additional shares. The Founder Members are the directors and officers of ABC who are entrusted to look for a business for a merger or an acquisition. They are expected to work hard for it until the completion of the merger or acquisition of a target business. Unless there is an executive compensation program, there is nothing to stop a director or officer from resigning. To avoid resignation and to recognize a director or officer’s expertise, the target business may offer a certain reward to that director which disclosure is required.
Robin, on the other hand, may wish to become an anchor investor by increasing the private placement share subscription to 1,400,000 Class A shares or committing to purchase a portion of the IPO shares. This will help ABC in the IPO offering. Robin is also a Sponsor and with warrants availability, the paper profit for Robin will increase.
The public investors will have to rely on the quality and expertise of the management of ABC. Since it was the IT business ABC intended to do, each of the directors and officers must show that they have the IT experience and qualification equipped with managerial experience. Public investors should understand what is technology and why technology is important that can influence society. For example, the invention of the smartphone depletes the use of line phones. The innovation of 5G created an advantage in its new networks that have greater bandwidth, giving higher download speed, and that compete with existing ISPs such as cable internet. 5G makes possible new applications in the internet of things and machine to machine. 4G cellphones could not use 5G networks. In ABC’s case, having the foresight and understanding of what ABC wants to do and will do is important and then apply the exponential theory for the investment in ABC for-profits, although secondary markets always carry a risk.