By Marc J. Lane
Special purpose acquisition companies, or SPACs, have become the Next Big Thing.
A SPAC is a shell company that’s listed on a stock exchange, but without having gone through much of the byzantine IPO process. It raises funds from investors to buy a yet-to-be-identified privately held company. If a suitable acquisition candidate isn’t found within two years, the SPAC must refund the investors’ money. SPACs raised a record $82 billion in 2020, creating a mad scramble to quickly put money to work.
Berkshire Hathaway’s CEO, Warren Buffett, is no fan of SPACs. In his view, fatter checkbooks, fewer target companies, perverse incentives, and a short time to put capital to work will inevitably lead to bad bets. As Buffett puts it, “It’s a different equation than you have if you’re working with other people’s money where you get the upside and you have to give it back to them if you don’t do something.”
The Securities and Exchange Commission has its own concerns. Seeing that Shaquille O’Neal, Jay-Z, and Alex Rodriguez, among other notables, have lent their names to SPACs, the SEC has alerted investors, “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”
But there’s more to the story.
Consider USHG Acquisition Corp., a blank-check company with Shake Shack creator Danny Meyer at its helm. USHG has raised $250 million based on Meyer’s argument that “the most compelling differentiator for long-term business success is when a company believes that the first input has to be the people working there, and the second input has to be the people who do business with them, the customers, and then the community in which they do business.” His stakeholder-driven acquisition strategy resulted in a gift of "a meaningful number of shares” to Share Our Strength, a highly respected national nonprofit seeking to end childhood hunger, of which Meyer is a director. The charity's CEO, Billy Shore, is also pushing for more companies to go public with charitable partners.
SPACS are likely to have a positive social impact in still another way. A SPAC’s unit price is likely to peak between the time a target company is identified and the completion of the merger transaction. That’s when many individuals will want to cash out and may seek to offset some of their taxable gains with charitable tax deductions. Contributing SPAC units to a public charity or donor-advised fund will avoid recognition of taxable gain while creating a deduction for the full value of the investment units contributed. Charitable recipients can then sell those units and put the proceeds to work in furtherance of their missions.
Laws passed in the last four years—including the Tax Cuts and Jobs Act (TCJA), the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, and the Consolidated Appropriations Act of 2021—provide tax incentives for gifts to charity. And President Biden’s new proposals, along with bills recently introduced in Congress, could provide even greater income tax incentives for charitable gifts of appreciated assets.
One proposal seeks to nearly double the income tax rate applied to sale of long-term capital gains assets for high-income earners. Under current law, they pay a 20% tax rate when they sell assets held for longer than one year. Under the President’s original plan (which is subject to change due to ongoing negotiations with Congress), individuals who earn more than $1 million would be subject to a 43.4% tax rate, including a surtax to help fund infrastructure investments. While it is unlikely that Congress will more than double the tax rate when high-income earners sell long-term capital gain property, many commentators agree that Congress will increase tax rates for the wealthy—resulting in significant tax savings for donors who give assets such as SPAC units to charity.
All things considered, SPACs, despite the controversy that surrounds them, may soon play a major role in funding charities and their missions, an outcome worth applauding.
If you would like to explore capital formation, securities, or tax planning opportunities that meet your needs and achieve your objectives, we invite you to reach out to Marc Lane, in confidence, at MLane@MarcJLane.com.