Indoor Farming Start-Up To Go Public Following Merger With SPAC

On Tuesday, September 29, 2020, AppHarvest, a Kentucky-based indoor farming startup, announced that it would go public through a reverse merger with Novus Capital Corporation, a publicly traded special purpose acquisition company (SPAC) listed on the Nasdaq.

The transaction is expected to close in late 2020 or early 2021. In announcing the business transaction, Novus Capital noted that AppHarvest is in a good position for rapid growth and value creation in pursuit of its goal to redefine American agriculture. The merger, valued at around $1 billion, includes $475 million in financing, $375 million of which will be new equity raised through a PIPE (private investment in public equity).

SPAC deals increasingly have become a popular source of growth funding even during the market disruptions and volatility caused by the COVID-19 pandemic. While SPACS have been around since the 1990s, they recently have become more commonplace, raising record amounts of initial public offering (IPO) funds and attracting underwriters. This Alert explains what SPACs are, how they work, and how they are staking a claim in the AgTech industry.

What Is a SPAC?

A SPAC, sometimes referred to as a “blank-check company,” raises money in an IPO in order to effect a business combination with an existing company and take that company public. Investors in SPACs typically pursue transactions in an industry in which they have a particular interest; however, in the case of Novus Capital, the SPAC’s prospective target was not limited to any particular industry or geographic region. Common acquisition targets for SPACs may include companies currently held by private equity funds, private company unicorns, and corporate spin-offs. In creating a SPAC, sponsors will not identify an acquisition target, even if they have tentatively or preliminarily identified one, in order to avoid SEC disclosure requirements.

A SPAC will launch an IPO seeking to raise capital from institutional and retail investors. The SPAC generally will offer “units” in the IPO, which are a combination of common stock and warrants to purchase common stock (Novus Capital offered units consisting of one share of common stock and one warrant). Once a SPAC completes its IPO, it becomes subject to regular reporting requirements per federal securities and applicable stock exchange rules and regulations. The funds raised in the IPO are placed in an interest-bearing trust account in which interest earned may be used to pay certain of the SPAC’s expenses until the SPAC completes an acquisition. Once placed in the trust account, the funds cannot be disbursed except in the acquisition of a target or in a return to investors.

Generally, a SPAC has two years to complete an acquisition, but the SPAC sponsor may seek to extend the deadline through a shareholder vote if the SPAC is running out of time. Once an acquisition target is identified and due diligence is completed, SPACs generally require a subsequent investor vote on the acquisition, and investors (whether they vote for or against the business combination) are given the opportunity to convert their shares into a pro-rata amount of the investor funds held in deposit in the trust account. If too many investors vote against the business combination (generally a majority of the outstanding shares) or redeem their shares, causing the SPAC’s net tangible assets to fall below a certain agreed-upon threshold or other closing conditions to fail, the business combination may not be consummated. If the business combination is not consummated, and the SPAC otherwise has run out of time, the SPAC may fail, with the investments refunded (possibly less some expenses).

What Are the Advantages of Engaging With a SPAC?

SPAC transactions have become an increasingly attractive alternative to both traditional IPOs and typical private equity transactions. According to Goldman Sachs, there have been 51 SPAC offerings in 2020 as of August 3, raising a record $21.5 billion, which is up 145% from the same period in 2019. A SPACInsider report from July 1, 2020, shows that SPACs raised $12.3 billion in capital in the first two quarters of 2020 alone.

SPAC transactions can appeal to businesses looking to capitalize on an accelerated IPO process, more liquidity, and the guidance of a more experienced partner — the SPAC sponsor — compared to the traditional IPO route. The experience a SPAC sponsor and its management team might have in a particular industry or business sector and/or in SPAC transactions themselves can especially benefit a target company.

What Is the Impact of SPACs on the AgTech Industry?

SPAC transactions present an opportunity for accelerated growth in the AgTech industry, especially in capital-intensive businesses, giving AgTech companies a chance to expand operations. In the case of AppHarvest, according to public reports, the faster IPO process and access to liquidity that SPACs can offer were of particular appeal. According to a release, the merger with Novus Capital will allow AppHarvest to rapidly scale agriculture facilities and advance its mission of “transforming agriculture.”

Beyond shaking up the AgTech firmament in the Midwest, the AppHarvest/Novus Capital merger may open the door for other AgTech companies to consider merging with SPACs, not to mention increase the visibility of AgTech companies to SPACs in search of targets. Involvement in AgTech appears to have a reciprocal positive effect on SPAC activity; since the announcement of the AppHarvest/Novus Capital transaction, Novus Capital shares were marked 26.2% higher in early trading. As SPACs compete for AgTech companies’ business, AgTech companies should take the following into consideration:

1. Comparison with Traditional Fundraising Methods. Has the company evaluated how pursuing a business combination with a SPAC compares to completing a traditional IPO, continuing to raise capital in the private markets through venture capital or private equity investors, or engaging in the sale or minority investment from a strategic or private equity buyer? Are there fewer legal, regulatory, or compliance issues that could impact the company’s ability to enter into a business combination with a SPAC?
2. Experience. What will this specific SPAC bring to the company in a merger? Do the SPAC sponsors have experience in completing a SPAC transaction? Do the SPAC sponsors have a firm understanding of the company’s particular sector of the AgTech industry? Does the SPAC have sector-specific operating partners in place?
3. Leadership. How will the board and management of the newly public company be decided between the various constituent groups, including the operating company and the sponsor? Will the existing board and management of the company transfer to the new public company?
4. Valuation. Does the company have a solid understanding of its potential public market valuation? Are there any external factors that could impact the valuation in the process of consummating a SPAC transaction?
5. Diligence, Disclosure, and Reporting. Does the company have audited historical financial statements and historical acquisition records sufficient to make required disclosures? Does the company have an internal control structure that can be documented? Would the company be able to provide forward-looking statements?

Companies that are unsure whether a SPAC transaction would best suit their needs should consult their corporate counsel and investment bankers for definitive guidance.