EP05 - Demystifying SPAC Investing with Securities Expert Julia Aryeh

EP05 - Demystifying SPAC Investing with Securities Expert Julia Areyh

Join us as we traverse the intricate world of Special Purpose Acquisition Companies (SPACs) with Julia Areyh, a skilled securities attorney. Julia breaks down the complex landscape of these shell companies, which have become a preferred and cost-effective route for companies desiring to enter the US markets. Get an insider's perspective on the SPAC merger process and understand how investing in these entities guarantees a minimum return. 

Our conversation then shifts gears to focus on the SPAC process and the redemption intricacies, which have a considerable impact on the public company’s value. Julia underscores the significance of having current accounting information for companies planning their entrance into the US market via a SPAC. She also sheds light on the advantages of becoming a public company. 

The episode concludes on an inspirational note as Julia shares her journey of returning to the legal field after a hiatus and her experience with the dynamic SPAC landscape. She underscores the necessity of being open to opportunities and refraining from self-imposed limitations. Drawing on her vast experience, Julia offers practical advice to first-time founders looking for funding - take measured steps, utilize resources smartly, and explore various funding options beyond SPAC acquisitions. Tune in for priceless insights from Julia's vast experience in the field.

Transcript

Stewart Noakes: 0:46

All right, I have great pleasure in welcoming Julia here to the fifth in our series of Investors Circle. Wonderful to have you here, mate. Thank you so much for doing this today. I guess it might be good to start with who are you and then really interested to talk about everything that are SPACs today. So why don't you start, Julia? Who are you?

Julia Areyh: 1:06

Hi, I'm Julia Areyh. I am initially from Zimbabwe and I've made it through from living in the UK all the way to living in New York and I now practice law. I'm a securities attorney. I work at a company called Loeb Loeb in New York City and my specialty practice at the moment is I'm a securities lawyer and we play in capital markets and what's up front and central is the SPAC market. So we do SPACs and DSPACs and I'll explain what those are.

Stewart Noakes: 1:39

And obviously you're a tribe member, you've been a founder Friday interview. We've got kind of like your life story out before, or at least part of it anyway and we met in Portugal, right. So that's right and we did.

Julia Areyh: 1:52

We had a student and I and a group of the canopy group. We started an internship program for college students in the US, and we had a very successful run. We took students from the United States and parked them in Portugal for the summer in 2019, where they studied at the Nova School of Business Economics and also had internships at a bunch of companies, ranging from very early stage startups all the way to developed companies in Portugal, and it was one of the best experiences they ever had. So I want to you know again, reiterate how valuable this connection is and this group of people are, because it manifests itself in so many valuable ways in places that you wouldn't even think of and you know. It was an amazing experience.

Stewart Noakes: 2:41

And I have to say I mean there's a very kind West Bay. It was an amazing experience on the other side of that as well and meeting the kids that came through, including your own kids that were part of that program, and just all the startups that got involved as well. I thought it was amazing, so wonderful, to have you here. Now, what is the SPAC and how on earth does this stuff work? Let's go with that one.

Julia Areyh: 3:00

Okay, so SPAC is a is an acronym for Special Purpose Acquisition Company. What a SPAC is? It's an IPO of a shell company that raises up a particular amount of money and puts that money into a trust fund and the management team goes out and looks for an appropriate target to merge with the company and they will do a merger acquisition where the SPAC, which is the company that goes public, sits out there and the target is merged into that SPAC, into that entity. It's a. It's was a very, very big boom in 2021, where we had hundreds of SPACs that were out there and we raised billions of dollars. The average size SPAC in 2021 was about 300 million.

Julia Areyh: 3:54

And basically what happens is the SPAC it's created, it goes through an IPO process, which is an initial public offering, so it gets listed either on NASDAQ stock exchange or the New York stock exchange and the money stays in a trust account through a third party and it sits there and the company goes out. The manager of the company goes out and tries to find a target to merge into that entity. Most SPACs are taken out at $10 a share. They stay at $10 a share for the life of the SPAC and actually, what's been in vogue since 2021, since the market has changed a little bit, we overfund the trust amount, so there is an interest built in there of about one to two percent it actually went as high as three percent during some points where that money gets put into the trust and the investors of the SPAC are able to get that back when they sell their shares or they redeem the shares.

Julia Areyh: 4:52

So while the money is sitting in trust, which is usually about two years at the lifespan of the SPAC, the management team of the SPAC go out and look for targets and the target's range have to be a minimum of 80 percent of value of the amount of money that is in the trust account. So if you have a hundred million dollars SPAC, they're looking for a target of at least 80 million in size. We did a lot of transactions. My largest transaction in 2021 and closed in 2022, was a company called Soundhound. That was a hundred and thirty three million dollars SPAC. They merged with a company that ended up with the valuation of two billion. They are now trading on the NASDAQ stock exchange and that was an amazing experience.

Julia Areyh: 5:37

Those are fewer and further between right now.

Stewart Noakes: 5:40

So what's good about this for the startup and what's good about this for the investor? How does the equation work?

Julia Areyh: 5:48

So as an investor, if you're investing at the outset, which is the IPO of the SPAC, the underwriters take that out at $10 a share and you buy shares in the entity for $10 a share, you are guaranteed as a stockholder to maintain $10 or, with the built-in interest of up to one to two percent, that money is guaranteed back. So to the extent that you want to stay in the SPAC, you're investing in the, whatever the target entity is going to be that the SPAC chooses to merge with. If you don't, at the end of the day, when it comes time to vote on that, on that acquisition, you have the right to redeem your shares. So you'll get a minimum of $10 a share. But if, as the, as this money sitting in trust for all of that time, you'll get interest on that. So most people who get in at $10 a share will end up with 1050, 1030. Some I've seen some as high as 1070 per share to get to redeem your shares, to get out. So that's on the public market side.

Julia Areyh: 6:51

On the private side the targets that they're looking into this is a much quicker way and a much more inexpensive way to go public For a company that wants to enter the US markets.

Julia Areyh: 7:02

This is probably the quickest and the most economical way to get through. There are a lot of SPACs out there that are looking for targets. They are very interested in international targets and, to the extent that a company is ready and trying to go into the public market, this is a very good door to go through, the reason being the entity is already public. There is already a built in investor base. Investors are very familiar with the SPAC market and, to the extent companies need money on the DSPAC side, which is the term we use for the merger because you're now not being a SPAC anymore, you are now going to be a real company In the DSPAC process. There are a lot of investors that have eyes on how good the investment opportunity is for the target that has been chosen, which makes it very interesting for companies that are looking to jump from being private and, in a certain level, to enter the public marketplace, which opens up a lot more doors, especially for financing purposes.

Stewart Noakes: 8:09

So I mean, these are incredible sums, right, but when you're talking about a hundred two hundred million SPAC and you're saying 80% of that for evaluation, these companies have to be quite a long way through the startup journey, right Is this?

Julia Areyh: 8:20

is this only for the best scale-ups, or where does it really fit on the so that will take care of a certain size of the marketplace, which is for a more developed company, and this, again, it's the reason to look at that level. When you're talking about the larger SPAC entities, you're looking at a company that's poised for tremendous growth and also wants to penetrate US markets. It's a very it's a layup type of situation if you want to go that route. I will say this much at the time of the business combination, because the, the public shareholders, have the opportunity to get out, which is what I was telling you before about the redemption process. At the time of the business combination, or if the process is taking longer and we need to extend the time that the company has to complete a business combination past the two year mark, we can do that, but we need shareholder approval. Once that piece happens, every shareholder that's in the public marketplace has the has the right to say yes, we are happy for you to expand or extend, but we want to get out. So they drop out and the, the, the SPAC that used to have 100 or 200 million in, will see a substantial amount of redemptions, which will drop the SPAC down from whatever it was in a couple hundred million down to on average now 30 to 100 million, which drops the bar down substantially. So in the last year we've seen a lot of that happening because of two reasons. One, the SPACs. It's been such a saturated marketplace that it's it's been difficult for companies to find the right target, which takes time, and during that process they run out of time. So they've had to either not finish the target that they were working with or they've had to extend the life of the SPAC to complete the target, which drops them down to a much lower tier, which opens up again a whole new range of territory, because now that the bar is lower, we're looking at companies that are 20 to 50 million as opposed to north of 80 million.

Julia Areyh: 10:34

So the good news is that in reviewing some of these target candidates, the valuations are quite lucrative. There's not as much scrutiny as if you were taking company public right on its own, because the matrices are different. So if you were taking a traditional route and you wanted to go public, even if you're a small company at five, 10, 15 million, and that's your target entry price, the scrutiny and valuation levels are a lot higher because you're evaluating the company before the public Cut off with a spike. It's the reverse. The entity is already in place.

Julia Areyh: 11:15

What you need to do is justify a valuation, and that can be based on a bunch of different criteria, including Peers in its class, that are already public and that can help justify the the high evaluation if you're trying to penetrate that market and by being a public entity, you can evaluate a company on projected you know revenues or a performer projection, based on criteria that are going to be very different because you're a public entity. So there's a little bit more flexibility on Valuations. I'm not saying that they should be unjustifiable, no but there's a little bit more flexibility in how you can position the company in order to justify Evaluation.

Stewart Noakes: 11:58

That would fall into that category and I mean, I've never been involved in one of these in turn, but I kind of see it as a launchpad. Right, you come into the American market, you've got this potential extra liquidity, you've got this lovely access point, this credential of being a public company, and they can trade in the US market in a completely different way. So hopefully then you skyrocket, right, you really go go somewhere right.

Julia Areyh: 12:20

So some of the things to consider when doing well, this is to be considered for any Company that's looking for institutional investment or going public or trying to be part of a spec Make sure your your accounting is up to snuff, because what ends up happening is we end up seeing a Fantastic target but they don't have their accounting done With the international's accounting standards. If you're coming into the US market, you have to come up to gap standards. We also do a lot of specs that are offshore specs. So Virgin Islands or Cayman entities. If you want to stay offshore, that's still fine. You can still list on an American exchange and continue as a European or a non-American entity and Mude with a spec that is Cayman or Virgin Islands Domiciled. If you wanted to go with the Delaware spec, we can read on missile to Cayman or any other jurisdiction of your choice and maintain that possibility as well, which gives you a little bit more flexibility. But again, some of the Achilles heel is get your accounting stuff in order. It's. It helps a lot.

Stewart Noakes: 13:32

Okay, okay. So for people who don't know you have not seen the founder Friday or anything you know can you give a bit of a background about how you've got into this kind of stuff? What makes you awesome at this stuff?

Julia Areyh: 13:44

But I also added but it's a very specific type of practice. I actually started my practice gosh 30 years ago at a big law firm in New York City and a firm called Kelly Dry and Warren. We did a lot of this type of public market offerings in those days and in those days they were just called blank check companies and they were not very in vogue and most of them were done over the counter or were used to be called the NASDAQ small cap market. Fast forward 30 years, I get a call one day that the firm that I'm at now, Loeb and Loeb, needed help, and so I got a phone call and they said do you have this experience? Would you consider coming back? And I said, hell, no, no, I left this for a reason, it's you know. And then they said well, just think about it. So I did and I said, oh fine, that's a weird thing that I would get a call out of the blue. And so I called Loeb and I said, okay, I just want to let you know I'm a little rusty on this stuff. And they said rusty's. Okay, we need help because there was so many facts going on, and so I jumped back in and, ironically, nothing has changed in 30 years.

Julia Areyh: 15:01

They have some things of different names, but it is still a very specialized practice of law. It's a faint of heart. It's during crunch time. Hours can be long, the components are extremely sophisticated, but they do follow a pattern. So they do repeat, they do look like they look the same. But I will say this much it is. It's a lot of fun. The deal terms can be extremely challenging because we have to be creative in making things work as market conditions change on a daily basis, but we get them done and it's fantastic. And I will say, from a networking perspective, I have really broadened my network and my spectrum. As to the investors, I'm dealing with the lawyers all over the world, entrepreneurs, because they're the ones that are advisors to these companies. They're the ones that are sourcing these companies. They are getting into the capital markets arena through this door and it's just been fantastic. It's really terrific. I love it.

Stewart Noakes: 16:13

What did you study a university or anything to get into this field in the first place?

Julia Areyh: 16:20

I actually went to rugby school in England and I was supposed to go to the University of Edinburgh but I met some students on the tube that were lost in London and they were US students and they said to me, can you help me get to where I need to go? And I became really good friends with them. The next thing I knew I dropped everything in the UK and off I went into the States. I went to Syracuse University and then law school in the city and when I graduated I went into Kelly Dry and started this practice and again, it was a very specialized type of law and that's what I did and I loved it then and I love it now.

Stewart Noakes: 17:05

So it's all thanks to the London Tube. I love it, it is.

Julia Areyh: 17:10

It's a sliding door. You never know what can change your life and, at the end of the day, something that has unknowns and this is a life lesson that I've learned and I love by it is don't limit yourself by what you think. Open yourself to the possibilities, and you never know what that's going to be. And if you have that mindset, there's the sky is the limit. There's no limits as to what you can do. So don't stop by thinking. Just open your mind and open your options, and it's an amazing thing.

Stewart Noakes: 17:51

So you're basically saying next time on London Tube don't look down, just look up and meet some people, because you never can tell where you're going to you never can tell, you never can tell. With your wealth of experiences and entrepreneurs and lawyers, and investor and through all this stuff, I wonder if you could finish this out today by just giving your best advice for a first-time founder watching this today who's maybe going to raise their first funds. What would you say to them?

Julia Areyh: 18:14

Think big and dream big, because if you don't do that, then you don't have a light shining on a runway. That's going to be something you should be able to take off on one day. So don't be limited by thinking. You have to. You know, don't go in a certain direction, I will say, but in doing that, take one step at a time and put one foot in front of the other in sequence, because don't try to jump off a cliff. Take the stairs down. There's a process to get to where you want to go. So, you know, be open-minded and as big as you can be, but proceed towards that goal carefully and mindfully.

Julia Areyh: 19:03

Use resources everywhere. Ask lawyers questions You're going to need it Even if you don't think you need them and accounting questions, even if you don't think you need them. Yet you actually do, because sometimes they will tell you what you need to look for and set some of the milestones that you're going to need to cross in order to get to where you're going. And it might sound expensive, it might sound more than I need right now, but that's okay. It's better to have these things mapped out for you, because it'll make your journey a little bit more organized and a little bit more productive, and as you hit them you'll suddenly realize, oh my goodness, I've done A, b and C and that's not on my to-do list anymore and so it's a bit of more of an organized approach, and that I would bear those things in mind.

Stewart Noakes: 19:50

Thank you so much and thank you so much for doing this today. It is wonderful to know you and it's wonderful to have this kind of captured today, because you brought something really special to this series. Nobody else that we're going to interview is going to talk about SPACs and stuff, and you've just given a whole different perspective to the series. So thank you so much for making the time for us today.

Julia Areyh: 20:08

It's my pleasure. And for those of you who would like to think that you're too small or you're unable, you never know. There's an appetite out there and even if it may not be these SPAC acquisition, once the SPAC has done one, there's many, many, many more. So they like to keep going. So keep that in mind.

Stewart Noakes: 20:27

Thanks to you.