We’ve been seeing SIRC hint at a merger with a SPAC in order to up list to NASDAQ versus going at it on their own. It’s very early in the process it sounds like, but I wanted to get down some of my thoughts on a potential SPAC merger versus an alternative to up listing themselves.
This is all subject to change as more info comes to light, so some of this is theoretical. Please bear that in mind. The goal if this is to hopefully give you some more perspective, though it may be controversial.
What is a SPAC and How Does It Work?
I don’t want to re-hash this too much, so some supplemental reading may be helpful here… SPACs are very complicated processes and I’m going to dumb it down bigtime.
A SPAC (post IPO) is a publicly traded shell company that’s sole purpose is to merge with another company. The SPAC received locked up funds from its IPO and they generally have some pre-determined amount of time to identify a target company. If they don’t, all of the investors get their money back and the company is liquidated.
The original SPAC “sponsors” before the IPO are compensated primarily through equity in the SPAC in return for their services. So it’s another form of dilution. In addition, the SPAC sponsors have also paid investment bankers around 5% of the IPO proceeds.
After the combination, the holders of the target company receive shares of the SPAC proportionate to their current ownership (less the dilution above), which then generally changes its name and ticker. Subsequently, the original SPAC shareholders are given new shares in the company or get their money back.
The whole concept here is that it’s “easier” for the empty SPAC to go public than the target company to go public or up-list on its own. The target company, while now diluted some, is trading on NASDAQ (or wherever) and now has capital from the SPAC IPO at its disposal.
There’s WAY more to it than this, so I’m oversimplifying in places. If you want more reading, this is the best site I have found: https://spac.guide/spacbasics/. NOTE – this site is VERY biased towards SPACs and makes it sound like they’re the best thing since sliced bread. So take that as you will.
How Would This Work For SIRC?
Following the above explanation, it could go something like this:
- SPAC identifies SIRC or vice-versa as a candidate for merger.
- SIRC merges with SPAC.
- SIRC shareholders who owned, say 10% of SIRC, now only own 5.0% of the SPAC due to the dilution above.
- The new company now trades on the NASDAQ and has some amount of capital remaining from the SPAC. Say, $50m.
- SIRC can use NASDAQ to raise better quality financing and can reinvest the $50m.
In the end, a SIRC will own a diluted stake in a company that’s now trading on NASDAQ and has access to more capital. Furthermore, some of the dilution (which could be 20% of the dilution) was to compensate the original SPAC sponsors.
To put it very plainly, a lot of people take a cut of SIRC in order for SIRC to up-list and for them to get capital.
What’s the Alternative?
We’ve talked about SPAC’s a lot, but most companies that go public or up-list to the NASDAQ, etc. do not use them. If a company is already public and they want to up-list, they do it the old-fashioned way. This is done by becoming fully SEC reporting, meeting share price requirements, having proper corporate governance, etc.
In this case, the company itself is on the hook for paying for it themselves. They have to pay legal fees, deal with NASDAQ, issue additional filings, and maybe reverse split.
THERE IS NO CLEAR CONSENSUS AS TO WHETHER OR NOT A SPAC IS A CHEAPER ALTERNATIVE TO UP-LIST VERSUS DOING IT YOURSELF. I will get that out of the way now. It’s very facts and circumstances based and it’s impossible to tell.
However, I personally have a preference… opinion time for sure!
My Take – Opinion Time
SPACs, to me, seem like too much of a fad or gimmick versus just organically up listing. Why?
In General
First off, the company is going to lose some control and have to dilute their position for the sole purpose of up listing. For example, would you be okay with SIRC issuing $10m worth of new shares (arbitrary number) just to be on NASDAQ? SIRC could also be “rushing” into an up list this way by inserting themselves into the NASDAQ instead of qualifying for it organically and could be subsequently delisted within 6-12 months.
Now, there are exceptions, this is a fact. Not every company that up lists from the OTC to NASDAQ has been successful. Heck, I would bet greater than 50% of them were NOT successful.
However, the way I see it is like this. The patience and general “cleaning up house” of up listing to NASDAQ tells me that the company is on an upwards trajectory in some respect. It didn’t need to gimmick its way into NASDAQ and dilute itself just to trade on a better exchange.
I would rather see a quality company with a great foundation, growth, and management and its natural progression is NASDAQ versus it just latching onto a SPAC, bearing the associated costs, and not being ready.
Reverse Splits
A final point people make… reverse splits… To be honest, if SIRC is on the right path of growth and trajectory, a reverse split WILL NOT MATTER. My philosophy is this: If you think a company is not worth investing in ONLY because it’s going to reverse split, YOU SHOULDN’T BE INVESTED IN IT ANYWAYS.
Remember, a reverse split does not actually change anything except for raising the share price and lowering the number of shares. That’s it. All of the other noise that comes afterwards are from the dumpster tier OTC stocks that reverse split as part of a death spiral. SIRC is not, in my opinion, in a death spiral.
If SIRC is ready for NASDAQ (which it’s not right now), it reverse splits, and the share price drops because of it, I would gladly buy more.
My Preferred Timeline
In terms of my preferred timeline – I would rather SIRC get a stronger base under itself on the on the pinks or even on the QB before it tries to do something drastic with an up list via a SPAC. My preferred step plan would be:
- Cash flow positive for 12 months.
- 1-2 more transformative acquisitions closed (including AVCO).
- 12-24 months of consecutive revenue growth.
- Reverse split (if needed) and NASDAQ up list over a 6-12 month subsequent period.
Sorry I rambled on here, let me summarize: SIRC should not rush into up listing into a costly SPAC. SIRC should get more solid business and financial footing before trying to up list organically in ~1-2 years, even if it means a reverse split. A SPAC is risky and could prematurely put SIRC on the NASDAQ at the cost of serious, potentially toxic, dilution and future de-listing.
All of this being said, there is definitely more to come here. We don’t even know the SPAC, the terms, etc. or if it’s even happening. So the discussion above is very hypothetical. But hopefully it gave you some perspective in the meantime.
Anyways – thanks as always for reading and feel free to tell me how wrong I am!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN SIRC. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
