Mercado Libre and venture capital firm Kaszek announced this Monday (13) the creation of a joint venture to invest in digital businesses in Latin America. The company, named Meli Kaszek Pioneer, filed with the Securities and Exchange Commission (SEC) for an offering of 25 million ordinary A Class shares at an initial price of $ 10 each.
The partners informed that the new company is expected to be listed on the Nasdaq under the ticker “MEKA”. BofA Securities, Goldman Sachs, Allen & Company, and JPMorgan should be the underwriters of the offering. “The company intends to raise capital through IPO for acquiring a company in Latin America’s digital ecosystem”, said Mercado Libre and Kaszek in the statement.
The SPAC, also called a “blank check company,” provides private businesses a path to enter the public stock market more quickly than an IPO process — it takes a few months, while an IPO can take more than a year — by using mergers and acquisitions (M&A) regulatory arbitrage, which is simpler than the rules for listing a company on the stock exchange. In other words, you trade one set of regulations for another.
In other words, an SPAC is a non-operational company listed on a stock exchange to raise money to buy another company. The model is growing popular on Wall Street. In Latin America, so far, no technology company has been listed through a SPAC, although the hunt for the first deal has already begun for at least five newly launched vehicles: Alpha Capital, Valor Latitude, SoftBank, DILA Capital and XPAC Acquisition Corp.
But how does it work? Generally, SPACs are managed by corporate leaders, successful entrepreneurs, and well-known investors who create a company without any actual operations. These managers (also called sponsors) take the SPAC to the market through a regular IPO in a process coordinated by investment banks. This process, as a whole, is easier since the company does not have a history to audit. It was born with a single purpose: to merge with another company.
Investors, generally unfamiliar with LatAm startups, believe in the sponsor’s experience to filter the prospective companies and make a good deal. Investors buy SPAC shares, traditionally for $10, despite not knowing with which company the SPAC will ultimately merge.
After the IPO, the SPAC starts looking for a target company that wants to go public. Under the regulation, the vehicle can extend its deadline but, generally, the SPAC has two years to find a company and make a deal.
If that doesn’t happen, the money goes back to the investors and the SPAC dissolves. But if the SPAC merges with a company that wants to go public, that target company gets its spot on the stock exchange and the SPAC ticker turns into the target company’s name.
Since SPAC follows the M&A rule, it can only merge with a single company. After the transaction, investors in the blank-check firm receive shares in the newly listed company and SPACs managers usually get 20% of the shares. To take other companies to the public market, managers can create other SPACs vehicles, numbers II, or III, for instance.