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

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Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>SPAC IPO activity is nothing to write home about, but it’s outpacing traditional IPOs.&nbsp;The SPAC IPO market continues to trundle along at a tortoise-like pace, with only one new pricing since last week—Asian-based SK Growth Opportunities Corp (SKGRU). This brings the grand total to three for the month. If there are no more additions in the next two days, June 2022 will be the eighth consecutive month in which the number of IPOs has declined and the slowest month in the SPAC IPO market since March 2020. The last SPAC IPO, however, was one of the largest in recent times, raising proceeds of $200 million. Meanwhile, the backlog of SPAC IPOs stands at 144, down from 269 at the start of the year. It is worthy to note that however quiet the SPAC IPO market is, it is outpacing traditional IPOs in the US by almost two to one so far in 2022.</li>
<li>A de-SPAC in demand?&nbsp;June has been a busier month for new IBC announcements, with two new additions bringing the monthly number to double digits (10), albeit well short of the 19 announcements in May. We have also seen nine de-SPACings completed so far in June and that number should swell to 10 before the month ends following Northern Lights Acquisition Corp’s (NLIT) shareholder approval of its pending merger with cannabis finance provider Safe Harbor. As we mentioned in last week’s SPAC Talk, the Gores Guggenheim (GGPI) $20 billion combination with Swedish electric vehicle (EV) manufacturer Polestar, completed on June 23, was not only an anomaly, not only for being among the largest ever de-SPACs, but also because of its better-than-expected redemption rate of 20% (originally anticipated at 25%), especially in the prevailing high redemption environment. Average redemptions have consequently dropped to 78% in June but would be 87% ex-GGPI.</li>
<li>Watch out for lock-up expirations.&nbsp;Our SPAC Talk Focus this week looks at SPAC lock-up agreements, of which there are multiple variations. They can have a significant impact on de-SPAC price movements around the time of expirations. Note the BuzzFeed (BZFD) chart as only one recent example.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/283/522/original/image_54106699721656543135326.png?1656543137" class="editor-image img-responsive" data-smartkarma-image-id="283522"></figure>
<h2>SPAC HAPPENINGS IN JUNE</h2>
<p>Figure 1: IPO Pricings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/283/524/original/image_41559241331656543160010.png?1656543161" class="editor-image img-responsive" data-smartkarma-image-id="283524"></figure>
<p>Source: WTR Research</p>
<p>Figure 2: IBC Announcements</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/283/526/original/image_7765721641656543181774.png?1656543183" class="editor-image img-responsive" data-smartkarma-image-id="283526"></figure>
<p>Source: WTR Research</p>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/283/527/original/image_95788711951656543217180.png?1656543220" class="editor-image img-responsive" data-smartkarma-image-id="283527"></figure>
<p>Source: WTR Research</p>
<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/000/283/528/original/image_73984698761656543246570.png?1656543248" class="editor-image img-responsive" data-smartkarma-image-id="283528"></figure>
<p>Source: WTR Research</p>
<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/000/283/529/original/image_86433834871656543269897.png?1656543272" class="editor-image img-responsive" data-smartkarma-image-id="283529"></figure>
<p>Source: WTR Research</p>
<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/000/283/530/original/image_48449577281656543291216.png?1656543293" class="editor-image img-responsive" data-smartkarma-image-id="283530"></figure>
<p>Source: WTR Research</p>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/283/531/original/image_84017198891656543312695.png?1656543315" class="editor-image img-responsive" data-smartkarma-image-id="283531"></figure>
<p>Source: WTR Research</p>
<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/000/283/532/original/image_343359588101656543334850.png?1656543337" class="editor-image img-responsive" data-smartkarma-image-id="283532"></figure>
<p>Source: WTR Research</p>
<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/000/283/533/original/image_399106252111656543355855.png?1656543358" class="editor-image img-responsive" data-smartkarma-image-id="283533"></figure>
<p>Source: WTR Research</p>
<h2>SPAC TALK FOCUS</h2>
<h2>Lock-Up Agreements in SPAC Land</h2>
<p>Although not mandated by the SEC or any other regulatory body in the US, lock-up agreements are common fare in traditional and SPAC IPOs. A lock-up agreement is a legal agreement between underwriters and the issuer and its directors, officers, and control persons in connection with offerings of securities. Such agreements tend to be initiated by the underwriters of a new issue as a protection measure against heavy insider selling flooding the nascent market for the company’s shares and driving the price down.</p>
<p>For most traditional IPOs, there is a 180-day (about six months) standard for lock-up periods. For SPAC sponsors, the lock-up period for SPAC IPOs is typically longer. SPAC sponsors agree to these longer lock-up periods to provide time for the acquisition company to identify a target company. In 2020 and early 2021, it was typical for most SPAC sponsors to commit themselves not to transfer, assign, or sell any of their shares until the earlier to occur of: (1) one year after the completion of an initial business combination, and (2) the date at which the SPAC completes a liquidation if an IBC does not occur in time. However, as conditions in the SPAC market got tougher, an increasing number of agreements have been shortening the lock-up period to six months post-IBC consummation. Furthermore, many SPAC lock-up agreements stipulate pricing triggers, which, if met, could allow SPAC sponsors to the shorten their lock-up periods for at least a portion of their shares.</p>
<p>Just by way of example, some of the variations in founder shares lock-up agreements can be seen in the three SPAC IPOs priced in June 2022.</p>
<h3>Acri Capital Acquisition Corporation (ACAC)</h3>
<p>Sponsors agree not to transfer, assign, or sell any of their founder shares until the earlier of&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">six months</span>&nbsp;after the date of the consummation of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, the date on which the last reported sale price of ACAC’s Class A common stock&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">equals or exceeds $12.00 per share</span>&nbsp;(as adjusted for share splits, share dividends, reorganizations, and recapitalizations)&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">for any 20 trading days within any 30-trading day period commencing after its IBC</span>.</p>
<h3>Feutune Light Acquisition Corporation (FLFV)</h3>
<p>Sponsors agree not to transfer, assign, or sell&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">50%</span>&nbsp;of their founder shares until the earlier of six months after the date of the consummation of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, the date on which the last reported sale price of FLFV’s Class A common stock&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">equals or exceeds $12.50 per share</span>&nbsp;(as adjusted for share splits, share dividends, reorganizations, and recapitalizations) for any 20 trading days within any 30-trading day period commencing after its IBC.&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">The remaining 50%</span>&nbsp;of the founder shares may not be transferred, assigned, or sold until&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">six months</span>&nbsp;after the date of the consummation of the IBC or earlier in the event of the SPAC’s liquidation.</p>
<h3>SK Growth Opportunities Acquisition Corporation (SKGR)</h3>
<p>Sponsors agree not to transfer, assign, or sell any of their founder shares until the earlier of one year after the completion of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, if the price of SKGR’s Class A common stock equals or exceeds $12.00 per share (as adjusted for share splits, share dividends, reorganizations, and recapitalizations) for any 20 trading days within any 30-trading day period commencing&nbsp;<span style="box-sizing: border-box; text-decoration: underline;">at least 150 days</span>&nbsp;after the IBC.</p>
<p>In de-SPACs, the lock-up conditions for the target company’s shareholders and PIPE investors are typically held to a standard 180-day no-sell agreement, which resembles the typical lock-up terms for insiders associated with traditional IPOs.</p>
<p>Lock-up expirations can have an accentuated impact on de-SPAC share price movements around the time of a lock-up expiration, particularly where there is a relatively small float. One recent example is media firm BuzzFeed (BZFD), which was de-SPACed on December 4, 2021. The shares have dropped ~60% since May 26, 2022, including a one-day decline of ~40% on June 6. The Wall Street Journal cited a BuzzFeed spokesperson who attributed the volatility to the lock-up period, which he said expired on June 1, adding that the company had a very low “float” and few owners of its stock making it sensitive to extreme fluctuations when major investors sell. The sponsors of the SPAC, which merged with BZFD, own ~6% of the de-SPAC, with their lock-up due to expire in early December 2022.</p>
<p>We estimate that there are as many as 48 de-SPACs with upcoming lock-up expirations between now and the end of the year. Given the multiple variations in SPAC/de-SPAC lock-up agreements, it behooves public investors in SPACs/de-SPACs to be aware of lock-up expiration timelines in by checking SEC filings to better prepare for periods of potentially extreme share price volatility.</p>
<h2>DISCLOSURES</h2>
<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 sector 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


SPAC IPO activity is nothing to write home about, but it’s outpacing traditional IPOs.&nbsp;The SPAC IPO market continues to trundle along at a tortoise-like pace, with only one new pricing since last week—Asian-based SK Growth Opportunities Corp (SKGRU). This brings the grand total to three for the month. If there are no more additions in the next two days, June 2022 will be the eighth consecutive month in which the number of IPOs has declined and the slowest month in the SPAC IPO market since March 2020. The last SPAC IPO, however, was one of the largest in recent times, raising proceeds of $200 million. Meanwhile, the backlog of SPAC IPOs stands at 144, down from 269 at the start of the year. It is worthy to note that however quiet the SPAC IPO market is, it is outpacing traditional IPOs in the US by almost two to one so far in 2022.
A de-SPAC in demand?&nbsp;June has been a busier month for new IBC announcements, with two new additions bringing the monthly number to double digits (10), albeit well short of the 19 announcements in May. We have also seen nine de-SPACings completed so far in June and that number should swell to 10 before the month ends following Northern Lights Acquisition Corp’s (NLIT) shareholder approval of its pending merger with cannabis finance provider Safe Harbor. As we mentioned in last week’s SPAC Talk, the Gores Guggenheim (GGPI) $20 billion combination with Swedish electric vehicle (EV) manufacturer Polestar, completed on June 23, was not only an anomaly, not only for being among the largest ever de-SPACs, but also because of its better-than-expected redemption rate of 20% (originally anticipated at 25%), especially in the prevailing high redemption environment. Average redemptions have consequently dropped to 78% in June but would be 87% ex-GGPI.
Watch out for lock-up expirations.&nbsp;Our SPAC Talk Focus this week looks at SPAC lock-up agreements, of which there are multiple variations. They can have a significant impact on de-SPAC price movements around the time of expirations. Note the BuzzFeed (BZFD) chart as only one recent example.

SPAC STATISTICS

SPAC HAPPENINGS IN JUNE
Figure 1: IPO Pricings

Source: WTR Research
Figure 2: IBC Announcements

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
Lock-Up Agreements in SPAC Land
Although not mandated by the SEC or any other regulatory body in the US, lock-up agreements are common fare in traditional and SPAC IPOs. A lock-up agreement is a legal agreement between underwriters and the issuer and its directors, officers, and control persons in connection with offerings of securities. Such agreements tend to be initiated by the underwriters of a new issue as a protection measure against heavy insider selling flooding the nascent market for the company’s shares and driving the price down.
For most traditional IPOs, there is a 180-day (about six months) standard for lock-up periods. For SPAC sponsors, the lock-up period for SPAC IPOs is typically longer. SPAC sponsors agree to these longer lock-up periods to provide time for the acquisition company to identify a target company. In 2020 and early 2021, it was typical for most SPAC sponsors to commit themselves not to transfer, assign, or sell any of their shares until the earlier to occur of: (1) one year after the completion of an initial business combination, and (2) the date at which the SPAC completes a liquidation if an IBC does not occur in time. However, as conditions in the SPAC market got tougher, an increasing number of agreements have been shortening the lock-up period to six months post-IBC consummation. Furthermore, many SPAC lock-up agreements stipulate pricing triggers, which, if met, could allow SPAC sponsors to the shorten their lock-up periods for at least a portion of their shares.
Just by way of example, some of the variations in founder shares lock-up agreements can be seen in the three SPAC IPOs priced in June 2022.
Acri Capital Acquisition Corporation (ACAC)
Sponsors agree not to transfer, assign, or sell any of their founder shares until the earlier of&nbsp;six months&nbsp;after the date of the consummation of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, the date on which the last reported sale price of ACAC’s Class A common stock&nbsp;equals or exceeds $12.00 per share&nbsp;(as adjusted for share splits, share dividends, reorganizations, and recapitalizations)&nbsp;for any 20 trading days within any 30-trading day period commencing after its IBC.
Feutune Light Acquisition Corporation (FLFV)
Sponsors agree not to transfer, assign, or sell&nbsp;50%&nbsp;of their founder shares until the earlier of six months after the date of the consummation of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, the date on which the last reported sale price of FLFV’s Class A common stock&nbsp;equals or exceeds $12.50 per share&nbsp;(as adjusted for share splits, share dividends, reorganizations, and recapitalizations) for any 20 trading days within any 30-trading day period commencing after its IBC.&nbsp;The remaining 50%&nbsp;of the founder shares may not be transferred, assigned, or sold until&nbsp;six months&nbsp;after the date of the consummation of the IBC or earlier in the event of the SPAC’s liquidation.
SK Growth Opportunities Acquisition Corporation (SKGR)
Sponsors agree not to transfer, assign, or sell any of their founder shares until the earlier of one year after the completion of the IBC and the date on which the SPAC’s liquidation is completed, or alternatively, if the price of SKGR’s Class A common stock equals or exceeds $12.00 per share (as adjusted for share splits, share dividends, reorganizations, and recapitalizations) for any 20 trading days within any 30-trading day period commencing&nbsp;at least 150 days&nbsp;after the IBC.
In de-SPACs, the lock-up conditions for the target company’s shareholders and PIPE investors are typically held to a standard 180-day no-sell agreement, which resembles the typical lock-up terms for insiders associated with traditional IPOs.
Lock-up expirations can have an accentuated impact on de-SPAC share price movements around the time of a lock-up expiration, particularly where there is a relatively small float. One recent example is media firm BuzzFeed (BZFD), which was de-SPACed on December 4, 2021. The shares have dropped ~60% since May 26, 2022, including a one-day decline of ~40% on June 6. The Wall Street Journal cited a BuzzFeed spokesperson who attributed the volatility to the lock-up period, which he said expired on June 1, adding that the company had a very low “float” and few owners of its stock making it sensitive to extreme fluctuations when major investors sell. The sponsors of the SPAC, which merged with BZFD, own ~6% of the de-SPAC, with their lock-up due to expire in early December 2022.
We estimate that there are as many as 48 de-SPACs with upcoming lock-up expirations between now and the end of the year. Given the multiple variations in SPAC/de-SPAC lock-up agreements, it behooves public investors in SPACs/de-SPACs to be aware of lock-up expiration timelines in by checking SEC filings to better prepare for periods of potentially extreme share price volatility.
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 sector 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: Upcoming Lock-Up Expirations May Need a Health Warning