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Subjecting SPACs to Stock Buyback Tax Is Bad Idea, Group Says

DEC. 14, 2022

Subjecting SPACs to Stock Buyback Tax Is Bad Idea, Group Says

DATED DEC. 14, 2022
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December 14, 2022

Ms. Lily Batchelder
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Dear Assistant Secretary Batchelder:

On behalf of the members of the SPAC Association (SPACA), which represents the key stakeholders involved in the special purpose acquisition company (SPAC) ecosystem, we write to share with you the deleterious impacts that the stock buyback excise tax will have on SPAC liquidations and redemptions and to request a meeting with you and your staff to discuss issuing guidance to clarify the scope of the excise tax. If SPACs are in fact subject to the tax, we urge you to create an application process for waivers and exemptions so that SPACs can retroactively seek relief from this tax as legally-required redemptions and liquidations are fundamentally different than corporate stock buybacks and should not be treated as such with respect to the stock buyback excise tax.

Broadly, SPACs raise money through private offerings that are then housed in a trust as the transaction is pending during the nine-month to two year-term where the SPAC sponsor seeks a target company for acquisition. SPACs are required by law to liquidate unless they reach a merger with a private company within this predetermined period to go public. A separate but similar legally required feature of the SPAC model is the redemption right, whereby shareholders can opt to sell their shares back to the SPAC sponsor and fully redeem their investment. These legally required features of the SPAC model that serve to benefit the shareholder are wholly separate from a voluntary corporate decision to repurchase shares that serve to benefit a company's share price. With this tax, shareholders and not the corporation will bear the burden.

If SPACs are subject to this tax, it will come with several unintended consequences that will harm capital markets in the US. Current SPAC sponsors and several members of the SPAC Association are currently weighing the decision to prematurely liquidate this month to stave off the uncertainty that will come as this tax goes into effect on January 1, 2023. For those currently in the middle of this process, the shareholders who made the investments and signed contracts understanding the 100% liquidation and redemption rights that are built into the contract, litigation is likely to occur and soar. Furthermore, future SPACs will certainly choose to domicile in foreign markets as opposed to the United States, and offshore entities will gain greater access to American capital markets, companies, and leaders of tomorrow.

The economic impact and potential of SPACs should not be understated. SPACs, The Engines of Sustainable Economic Value Creation, a May 2022 industry report from Intro-act, Inc., highlighted the economic value creation, stating “that newly listed DE-SPACs spent $3.5 billion (75% of sales) on CAPEX to increase their plant/operational capacity in 2021, up more than 200% from $1.1 billion (24% of sales) in 2020 . . . SG&A spend of these companies went up 240% from $2.7 billion in 2020 to $9.3 billion in 2021. A similar trend is also visible on the innovation front, with $4.2 billion in R&D investments in 2021, up 176% y/y.” SPACs can also be a solution to the shrinking numbers of Initial Public Offering (IPO), which continue to fall in number, and SPACs now account for the majority of IPOs in the country. According to the data cited in the report, “in 1980s and 1990s the average IPOs in a year were 378 and 560, respectively; however, in 2000s and 2010s, these numbers came down to 182 and 212, respectively.”

Chart 2 - SPACs Now Account for Majority of the IPOs in US

These IPOs and SPACs are generally aligned with many initiatives from the Biden Administration, including efforts to spur environmentally friendly businesses and technologies, boosting domestic manufacturing, and reducing the reliance on foreign supply chains. “The total capex made by companies in the EV sector stood at ~$1.9 billion in 2021, up 213% y/y and the highest across all sectors.”

Chart 7 - Total copex by DE-SPACs by Sector

At a time when economic uncertainty threatens our capital markets and with proposed rules and regulations from the U.S. Securities Commission (SEC) already aiming to hinder the future growth of the SPAC industry, subjecting SPACs to the excise tax is both unfair and unwise for pro-growth strategies to grow our economy. We hope you will accept our request to meet in person so that we can discuss the possibility of an exemption for all SPACs or options for a process through which SPACs can retroactively apply for waivers on a company-by-company basis. We look forward to working with you, and we thank you for your consideration.

Sincerely,

Samir N. Kapadia
Director, SPAC Association
2445 M Street NW, Suite 500
Washington, DC 20037

Bobby Cunningham
Director, SPAC Association
2445 M Street NW, Suite 500
Washington, DC 20037

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