During the past month, two seemingly unrelated series of Form 10 shells have had one curious commonality:  shareholders or directors who are also tied to SPACs. 

The convergence is not entirely unnatural since SPACs are essentially cash-rich shells, and it is a relationship that could deepen as blank check companies increasingly seek to live on as shells after liquidation to recoup value through reverse mergers.

One such series of shells with a SPAC connection is BSV I through VIII, which lists as a majority shareholder, Atlanta-based High Capital Funding.  High Capital controls just more than 50% of the voting shares in each BSV shell and 81% of the non-voting Class B stock, according to filings with the Securities and Exchange Commission.  David Rapaport, an executive vice president at High Capital is also general counsel for SPAC Middle Kingdom Alliance Corp., which is about 14 months into its search for a Chinese company to acquire with $28 million held in trust for such a purchase.

As further evidence of the intersection, Platinum Partners, a prominent SPAC investor, owns about 8% in each of the BSV shells, “SPAC management tends to [include] entrepreneurs and deal makers and hence it’s not surprising to be seeing some crossover in the management,” said Mark Nordlicht, Platinum’s chairman and the former chairman of SPAC Platinum Energy Resources, which completed a merger in October.

The management of SPAC Healthcare Acquisition Corp. has since moved on to invest in shells, as well.  John Pappajohn and Matthew Kinley are the sole officers and directors of new Form 10 shells Zeta Acquisition I through III.  Together they control 80% of the shells’ stock.  Healthcare Acquisition closed a $112 million deal with bio-defense pharmaceutical maker PharmaAthene last August.

For deals up to $50 million in size, SPACs and APOs could arguably be considered to be in the same business, said David Feldman, a founding partner at New York law firm Feldman Weinstein & Smith, who aided in the creation of the Zeta shells, as well as a plethora of other Form 10 shells.

Feldman, who does not advise SPACs, said it could be beneficial in some circumstances for SPAC management teams to include language in their registration documents that allows them to remain a shell after liquidation if their proposed mergers end up falling through. 

It’s prudent advice considering several SPACs are currently planning to do just that. 

SPAC Phoenix India Acquisition Corp. recently agreed to an acquisition it believes it will only be able to complete if it liquidates and gets shareholder approval to continue its corporate existence.  Phoenix said in an SEC filing that it planned to acquire 65% of Indian wind energy company Citius Power Limited, but that the deal would likely take longer than its allotted life span—the SPAC must complete a merger by April 5.

Phoenix is anticipating that it will have to liquidate and plans to ask shareholders to amend its charter to permit its corporate existence past liquidation.  It will then attempt to raise the capital needed for the Citius deal through a private placement—a transaction more akin to an APO than a SPAC.

Homeland security SPAC Good Harbor Partners Acquisition Corp. was able to liquidate and remain operational, only because it had two classes of shares. Class B holders, whose money was in trust, recouped their holdings, while Class A holders recently voted to stay vested, and according to Good Harbor management, the company will most likely engage in a reverse merger.

According to a number of attorneys advising SPAC issuers, outliving liquidation is not always a viable option.  The SEC does not favor a SPAC that attempts to go outside of its prospectus.  It could be possible to amend the corporate charter, one attorney said, but that could open management up to shareholder lawsuits.

High Capital’s Rapaport said in his case, the BSV shells and Middle Kingdom are entirely separate and unrelated investment vehicles.  He said the BSV shells were started several years ago, but were delayed for lots of reasons.  He said the only real similarity between the two is a common purpose of small-cap financing, a business Rapaport has been involved in for close to 40 years.  Rapaport stressed that he is simply an investor in the shells and is not participating in any deal structures.

“Most investors are looking to diversity their portfolios.   You never know what will hit and what won’t,” said Virginia Sourlis, founder of The Sourlis Law Firm, which created the BSV shells and many more like them.  Incidentally, Sourlis said that her firm is in the early stages of creating a SPAC and acting as the sponsor.  She said she is also considering taking on other SPAC management teams as clients.

When asked about the possibility of trying to mitigate risk by diverting investments away from a SPAC market that has seen at least five liquidation announcements so far this year, Platinum’s Nordlicht said, “If the market environment is poor, unfortunately all market vehicles tend to be affected, so I don’t see the Form 10/PIPE [structure] thriving in such an environment either.”