Earlier this week, the fast-casual burger chain BurgerFi received a noncompliance notice from Nasdaq. The company had delayed filing its annual report, a delay brought on by new reporting requirements for companies that go public by SPAC.
A SPAC is a special purpose acquisition vehicle that uses money from public investors to buy private companies, taking them public. And for much of the past year they were all the rage. More SPACs have been created so far this year than all of 2020 put together—and 2020 had more SPACs than each of the previous seven years combined.
That popularity has now ground to a halt. There have been only 10 SPACs in April, compared with 109 in March, according to SPAC Research. Investors have clearly cooled on them. CNBC’s SPAC 50 Index (yes, it has a SPAC index) is down 19% since its March peak.
The restaurant industry has been a popular place for SPAC creators and investors. There are a half-dozen such firms that are potentially targeting the restaurant industry, with another SPAC with a merger deal is in place. Former executives from Sonic, Dunkin’, Jamba and Barteca are all involved in a SPAC, as is the restaurateur Danny Meyer.
Most of these shell companies have potential targets outside the restaurant industry, and all of them could basically buy anything they decide upon. They have two years to make a deal or else the company dissolves, which has a tendency to loosen whatever restrictions there were on the shell company’s potential target list.
The presence of so many SPACs in the restaurant industry will make it harder for them to do deals within the industry, especially those that were targeting quick-service restaurants. And the companies most of these shells would prefer to target probably don’t want to go public that way. To wit: Torchy’s Tacos, which could have had its pick of SPACs but is instead looking at a traditional initial public offering.
But that gets us back to the BurgerFi situation and the SEC letter.
Earlier this month, the SEC wrote a letter regarding what it calls the “de-SPAC transaction,” or the deal that merges the SPAC with the private company, and the various disclosures that go along with it.
“If we do not treat the de-SPAC transaction as the ‘real IPO,’ our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards,” John Coates, acting director of the SEC’s division of corporate finance, wrote earlier this month.
New reporting requirements for these SPAC deals led to BurgerFi’s delayed earnings report and then put it into non-compliance with Nasdaq requirements, which is a difficult situation for a company’s first public company earnings.
Whether this sours other restaurants on SPAC deals remains to be seen. It was already going to be difficult for many of the restaurant SPACs to get the deals they’d want to get done within the two-year timeframe. Potential SEC headaches probably won’t do them any favors.
With many other likely buyers of restaurant chains out there, and traditional IPOs starting to open up again for stronger chains, SPACs could have an even more difficult time getting deals done—at least in the restaurant space.
Either way, the SPAC party is likely over. It was fun while it lasted.
UPDATE: This story has been updated to clarify that BurgerFi received a notice of noncompliance from Nasdaq.