SPAC Alternatives: Offshore Structures for Going Public

Few capital-markets structures have ridden a sharper cycle than the special purpose acquisition company. The SPAC went from a niche listing route to a 2020 and 2021 phenomenon, then cooled abruptly as deals underperformed, redemptions surged and regulators sharpened their scrutiny. The structure did not disappear, but the era of easy SPACs is over.

For founders and sponsors today, the relevant questions are more sober. Is a SPAC, or an offshore SPAC alternative, still a sensible way to take a company public or raise capital? Where does the Cayman Islands fit as a domicile for these vehicles? And in what circumstances does a SPAC genuinely beat a traditional IPO or a private route?

This article works through the mechanics, the sponsor economics and the judgement calls, with the post-2021 reality firmly in view.

What a SPAC is, in plain terms

A SPAC is a shell company that raises money from public investors with no operating business of its own. Its sole purpose is to find and merge with a private target within a set window, typically a couple of years, taking that target public through the combination rather than through a conventional initial public offering. The capital raised sits in trust until a deal is found; if no deal completes in time, the money is returned to investors.

The structure has a built-in protection that became its defining feature in the downturn. Public shareholders can usually redeem their shares for their share of the trust before a merger completes, even if they keep the warrants. When sentiment turned, redemption rates climbed steeply, so that many SPACs reached a deal only to find most of the promised cash had walked out of the door. Understanding redemption risk is now central to evaluating any SPAC.

The Cayman SPAC and offshore structuring

Many SPACs are incorporated offshore, with the Cayman Islands a common domicile, even where the eventual listing is on a major exchange. The reasons are familiar to anyone who has structured cross-border vehicles: tax neutrality at the entity level, a flexible and well-understood company law, a deep bench of service providers and a regime accustomed to capital-markets transactions.

A Cayman SPAC typically lists in the United States or on another international exchange while remaining a Cayman company, which can simplify the later step of acquiring a target that is itself outside the listing jurisdiction. Where the eventual operating business is in Asia, the Middle East or elsewhere, an offshore holding vehicle can be a more natural acquirer than a domestic shell would be.

Offshore domicile is not a way to escape the substance of securities regulation. Wherever a SPAC lists, the disclosure, governance and investor-protection rules of the listing venue apply to the listing and to the eventual merger. The offshore element addresses corporate flexibility and entity-level tax; it does not lighten the regulatory burden of being a public company. We are careful to keep those two things separate when advising sponsors, because conflating them leads to unpleasant surprises.

Sponsor economics and the promote

The economics that drew sponsors to SPACs centre on the promote, also called the founder shares or sponsor shares. Historically, sponsors received a block of shares for a nominal sum, commonly around a fifth of the post-IPO equity, in exchange for putting up the at-risk capital that funds the SPAC's setup and search costs. If a deal completes, that promote can be worth a great deal relative to the sponsor's outlay. If no deal completes, the sponsor typically loses that at-risk capital.

That asymmetry is exactly what attracted criticism. A sponsor stood to gain handsomely from almost any completed deal while public shareholders bore the downside, which created an incentive to get a transaction done rather than to get the right transaction done. In the cooler post-2021 market, the classic twenty-percent promote has come under pressure, and sponsors increasingly accept structures that defer, earn out or reduce the promote, and that better align them with the post-merger performance of the combined company.

For a prospective sponsor, the practical message is that the old economics should not be assumed. The amount of at-risk capital required, the dilution from warrants and the size and conditionality of the promote all need modelling against realistic redemption scenarios, not the optimistic ones that prevailed at the peak.

The post-2021 cooldown and what changed

The contraction was driven by several forces at once. Many companies that went public via SPAC traded poorly afterwards, denting the structure's reputation. Heavy redemptions left deals undercapitalised. Regulators in the United States moved toward treating SPAC disclosure and liability more like that of a conventional IPO, narrowing the perceived advantages around forward-looking projections that had made SPACs attractive to growth companies. The supply of credible targets also thinned as the backlog of shell companies chased a finite pool of businesses.

The net effect is a higher bar. SPACs still complete, but sponsors face more scrutiny, investors demand better alignment, and the route no longer offers the speed-with-soft-disclosure proposition that defined its boom. Anyone considering a SPAC today should plan for a process that resembles a traditional listing in rigour, even if it differs in mechanics.

SPAC, traditional IPO, or another route

The honest answer is that a SPAC is one tool among several, and it suits a particular set of facts. It can make sense where a company values certainty on valuation negotiated bilaterally with a sponsor rather than set by a volatile book-build, where it benefits from an experienced sponsor's operational involvement, or where market windows for a conventional IPO are closed but a negotiated combination remains possible.

A traditional IPO often serves better where the company is large, well understood and able to command strong demand in a public offering, since it avoids the promote dilution and redemption uncertainty inherent in a SPAC. And for many companies the right answer is neither: a private capital raise, a direct listing or simply staying private longer can be the superior path. We would always test a SPAC against these alternatives rather than start from the assumption that going public is the goal.

What we would not do is treat a SPAC as a shortcut around the obligations of being a public company. The companies that fared worst in the cooldown were often those that underestimated the cost, scrutiny and reporting discipline that follow the deal, regardless of how they got there.

How HPT helps

We help sponsors and founders weigh whether a SPAC, a Cayman or other offshore vehicle, or a different route entirely best serves their objectives. That includes modelling sponsor economics and redemption scenarios honestly, coordinating offshore incorporation and the listing-venue advisers, and being candid when a traditional IPO or a private raise is simply the better answer.

If you are considering a SPAC or an offshore alternative for raising capital or going public, we would be glad to help you think it through clearly.