Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>Deal or no deal?&nbsp;August ended as the second-best month of the year as far as SPAC Initial Business Combination (IBC) deal announcements are concerned. The month ended with 18 new deals announced worth an aggregate value of $9.7 billion, although the latter figure only ranked fourth highest of the year. August’s flurry of deal announcements fell just one short of May’s 19. So far in 2022, 104 new deals have been announced. On the flipside, nine IBC merger deals were cancelled, which represents the heaviest number of monthly casualties so far this year. The total for 2022 to date is 42, but this number does not include three deals whose notice of termination by one side of the transaction is being disputed by the other and are currently going through the courts as we discussed in last week’s SPAC Talk Focus.</li>
<li>More liquidations than ever before.&nbsp;To boot, eight SPACs liquidated their trusts in August, making it the largest monthly number of liquidations ever. This includes Ackrell SPAC Partners I (ACKIT), which announced the termination of its IBC with Blackstone Products, a manufacturer of outdoor cooking equipment, on August 31, and liquidated its trust at the close of the same day. So far, three more liquidations are scheduled to be executed for September. So far in 2022, liquidations both completed and planned total 21. With 55 SPACs facing merger deadlines of less than two months and 75 with deadlines of less than three months, it will be no surprise if we see a flurry of additional liquidation announcements over these time periods.</li>
<li>Are taxing times ahead for SPACs?&nbsp;A new excise tax on share repurchases was signed into law by President Biden on August 16 as part of the Inflation Reduction Act of 2022. This excise tax known as the stock buyback tax potentially increases friction for US-domiciled SPACs, particularly in the context of rising liquidations and a high stock redemption environment. We discuss further in this week’s SPAC Talk Focus.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/670/original/image_12667098841662075995212.png?1662075998" class="editor-image img-responsive" data-smartkarma-image-id="295670"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN AUGUST 2022</h2>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/671/original/image_3825608151662076026718.png?1662076028" class="editor-image img-responsive" data-smartkarma-image-id="295671"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/672/original/image_73976082561662076051004.png?1662076053" class="editor-image img-responsive" data-smartkarma-image-id="295672"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/673/original/image_68225599571662076074063.png?1662076076" class="editor-image img-responsive" data-smartkarma-image-id="295673"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/674/original/image_48571472581662076101415.png?1662076103" class="editor-image img-responsive" data-smartkarma-image-id="295674"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/675/original/image_31447714691662076127147.png?1662076129" class="editor-image img-responsive" data-smartkarma-image-id="295675"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/676/original/image_90272335101662076179123.png?1662076181" class="editor-image img-responsive" data-smartkarma-image-id="295676"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/678/original/blobid0.png?1662076237" class="editor-image img-responsive" data-smartkarma-image-id="295678"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/679/original/image_978741861121662076259502.png?1662076261" class="editor-image img-responsive" data-smartkarma-image-id="295679"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/295/680/original/image_649256337131662076289368.png?1662076291" class="editor-image img-responsive" data-smartkarma-image-id="295680"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>Are Taxing Times Ahead for SPACs?</h2>
<p>On August 12, 2022, Congress voted to pass the Inflation Reduction Act of 2022, which was duly signed into law by President Biden on August 16. The premise of the act is to fight inflation through several measures aimed at narrowing the deficit, lowering drug prices, and incentivizing the broader adoption of renewable energy to make the US less vulnerable to energy price spikes. The new law funds itself primarily through a mixture of tax-related measures and healthcare savings. The actual likely impact of the act on inflation is a matter of debate among economists but is not the subject of the following comments. Our focus is on the potential ramifications of the act on SPACs.</p>
<p>On this point, you might ask what does a law aimed at reducing inflation have to do specifically with SPACs? Well, the answer is that included in the tax measures incorporated in the new law is a 1% excise tax to be levied on corporate share repurchases by publicly traded domestic corporations (including certain publicly traded inverted foreign corporations treated as surrogate foreign corporations). This excise tax is known as the stock buyback tax and will be levied on a covered corporation, which is a domestically incorporated company whose stock is traded on an established securities market such as the NYSE, NASDAQ, London Stock Exchange, etc. There is no minimum market cap requirement applicable, so even small and micro-cap corporations or corporations in financial distress or bankruptcy will be subject to this stock buyback tax.</p>
<p>Although the statute does not specifically address the tax with reference to SPACs and absent any guidance from the US Treasury stating otherwise, legal and tax experts suggest that the new law’s broad scope will likely cover many transactions beyond typical stock buyback plans, including redemptions of stock by SPACs. In this regard, the stock buyback tax could be applicable to certain SPAC redemptions, including those in connection with de-SPACings, liquidations as well as redemptions in connection with SPAC extension or charter amendment votes. Given the rising prevalence of SPAC liquidations and the high levels of public stock redemptions associated, the stock buyback tax could be particularly onerous for domestic SPACs. It should be noted that such redemptions will be subject to the stock buyback tax to the extent they occur post December 31, 2022.</p>
<p>However, according to the experts, there may be greater scope for tax mitigation with respect to redemptions associated with de-SPACings. Depending on the structure of a de-SPAC transaction, the impact of the stock buyback tax may be reduced or eliminated by PIPE issuances, issuances pursuant to warrant exercises, the issuance of stock to target shareholders, founders, or sponsors in the de-SPAC transaction, the issuance of stock to employees under a long-term incentive plan, and any other stock issuances by the SPAC during the taxable year that includes the de-SPAC transaction.</p>
<p>Admittedly, it is not clear now whether redemptions associated with SPAC liquidations would be subject to the stock buyback tax. There are several exceptions to the stock buyback tax, including the repurchase of stock as part of a reorganization in which no gain or loss is recognized on such repurchases by a shareholder. Whether a SPAC liquidation falls into this definition remains to be seen. However, if liquidations are subject to the excise tax, the redemption payments should be able to be reduced by the amount of the tax, since SPAC charters typically condition such payments on the amount of lawfully available funds and include express references to the Delaware General Corporation Law requirement to provide for the payment of creditors (which the Internal Revenue Service would be) and other provisions of applicable law. On the flipside, under these circumstances, it could provide more pressure on SPAC sponsors and founders to over fund their trusts.</p>
<p>One final thought is that the imposition of the tax could provide additional incentives to form or re-domicile domestic SPACs in the Cayman Islands. However, if a Cayman-domiciled SPAC identifies a domestic target and as is typically the case, migrates to the US to effect the business combination, it is not clear whether such a SPAC will become subject to the excise tax if it redeems Class A shares after the migration. It also remains to be seen whether the SPAC could avoid the tax by repurchasing shares prior to the domestication.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


Deal or no deal?&nbsp;August ended as the second-best month of the year as far as SPAC Initial Business Combination (IBC) deal announcements are concerned. The month ended with 18 new deals announced worth an aggregate value of $9.7 billion, although the latter figure only ranked fourth highest of the year. August’s flurry of deal announcements fell just one short of May’s 19. So far in 2022, 104 new deals have been announced. On the flipside, nine IBC merger deals were cancelled, which represents the heaviest number of monthly casualties so far this year. The total for 2022 to date is 42, but this number does not include three deals whose notice of termination by one side of the transaction is being disputed by the other and are currently going through the courts as we discussed in last week’s SPAC Talk Focus.
More liquidations than ever before.&nbsp;To boot, eight SPACs liquidated their trusts in August, making it the largest monthly number of liquidations ever. This includes Ackrell SPAC Partners I (ACKIT), which announced the termination of its IBC with Blackstone Products, a manufacturer of outdoor cooking equipment, on August 31, and liquidated its trust at the close of the same day. So far, three more liquidations are scheduled to be executed for September. So far in 2022, liquidations both completed and planned total 21. With 55 SPACs facing merger deadlines of less than two months and 75 with deadlines of less than three months, it will be no surprise if we see a flurry of additional liquidation announcements over these time periods.
Are taxing times ahead for SPACs?&nbsp;A new excise tax on share repurchases was signed into law by President Biden on August 16 as part of the Inflation Reduction Act of 2022. This excise tax known as the stock buyback tax potentially increases friction for US-domiciled SPACs, particularly in the context of rising liquidations and a high stock redemption environment. We discuss further in this week’s SPAC Talk Focus.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN AUGUST 2022
Figure 1: IPO Pricings/Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings


Source: WTR Research

SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
Are Taxing Times Ahead for SPACs?
On August 12, 2022, Congress voted to pass the Inflation Reduction Act of 2022, which was duly signed into law by President Biden on August 16. The premise of the act is to fight inflation through several measures aimed at narrowing the deficit, lowering drug prices, and incentivizing the broader adoption of renewable energy to make the US less vulnerable to energy price spikes. The new law funds itself primarily through a mixture of tax-related measures and healthcare savings. The actual likely impact of the act on inflation is a matter of debate among economists but is not the subject of the following comments. Our focus is on the potential ramifications of the act on SPACs.
On this point, you might ask what does a law aimed at reducing inflation have to do specifically with SPACs? Well, the answer is that included in the tax measures incorporated in the new law is a 1% excise tax to be levied on corporate share repurchases by publicly traded domestic corporations (including certain publicly traded inverted foreign corporations treated as surrogate foreign corporations). This excise tax is known as the stock buyback tax and will be levied on a covered corporation, which is a domestically incorporated company whose stock is traded on an established securities market such as the NYSE, NASDAQ, London Stock Exchange, etc. There is no minimum market cap requirement applicable, so even small and micro-cap corporations or corporations in financial distress or bankruptcy will be subject to this stock buyback tax.
Although the statute does not specifically address the tax with reference to SPACs and absent any guidance from the US Treasury stating otherwise, legal and tax experts suggest that the new law’s broad scope will likely cover many transactions beyond typical stock buyback plans, including redemptions of stock by SPACs. In this regard, the stock buyback tax could be applicable to certain SPAC redemptions, including those in connection with de-SPACings, liquidations as well as redemptions in connection with SPAC extension or charter amendment votes. Given the rising prevalence of SPAC liquidations and the high levels of public stock redemptions associated, the stock buyback tax could be particularly onerous for domestic SPACs. It should be noted that such redemptions will be subject to the stock buyback tax to the extent they occur post December 31, 2022.
However, according to the experts, there may be greater scope for tax mitigation with respect to redemptions associated with de-SPACings. Depending on the structure of a de-SPAC transaction, the impact of the stock buyback tax may be reduced or eliminated by PIPE issuances, issuances pursuant to warrant exercises, the issuance of stock to target shareholders, founders, or sponsors in the de-SPAC transaction, the issuance of stock to employees under a long-term incentive plan, and any other stock issuances by the SPAC during the taxable year that includes the de-SPAC transaction.
Admittedly, it is not clear now whether redemptions associated with SPAC liquidations would be subject to the stock buyback tax. There are several exceptions to the stock buyback tax, including the repurchase of stock as part of a reorganization in which no gain or loss is recognized on such repurchases by a shareholder. Whether a SPAC liquidation falls into this definition remains to be seen. However, if liquidations are subject to the excise tax, the redemption payments should be able to be reduced by the amount of the tax, since SPAC charters typically condition such payments on the amount of lawfully available funds and include express references to the Delaware General Corporation Law requirement to provide for the payment of creditors (which the Internal Revenue Service would be) and other provisions of applicable law. On the flipside, under these circumstances, it could provide more pressure on SPAC sponsors and founders to over fund their trusts.
One final thought is that the imposition of the tax could provide additional incentives to form or re-domicile domestic SPACs in the Cayman Islands. However, if a Cayman-domiciled SPAC identifies a domestic target and as is typically the case, migrates to the US to effect the business combination, it is not clear whether such a SPAC will become subject to the excise tax if it redeems Class A shares after the migration. It also remains to be seen whether the SPAC could avoid the tax by repurchasing shares prior to the domestication.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: Are Taxing Times Ahead for SPACs?