BRYANT PARK CAPITAL Middle Market Update

B R Y A N T P A R K C A P I T A L

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BRYANT PARK CAPITAL, INC. (“BPC”) is an investment bank providing mergers and acquisitions and corporate finance advisory services to its clients. Our principal relationships exist with companies having revenues between $25 and $500 million. BPC professionals have a unique combination of experience, including experience in bulge-bracket investment banking, as principal investors, prior owners and operators of businesses. BPC excels in providing M&A advisory and capital raising services for complex deal structures. For more information on Bryant Park Capital, please visit www.bryantparkcapital.com.

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M e m b e r F I N R A / S I P C

ECONOMIC OUTLOOK: U. S. GDP EXPANDS FOR THE FIFTH CONSECUTIVE QUARTER, ALTHOUGH

STEADY UNEMPLOYMENT PERSISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

MERGERS & ACQUISITIONS: SUCCESSFUL HOSTILE TAKEOVER BIDS AND EMERGING MARKETS

ACCOUNT FOR THE LARGEST ACTIVITY .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

PRIVATE EQUITY: BOOM TIME MULTIPLES FUELED BY INCREASED SECONDARY SALES

ACTIVITY .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

DEBT CAPITAL: HIGH YIELD DEBT A CATALYST FOR THE U.S. DEBT CAPITAL MARKET .. . 9

FEATURED ARTICLE: GENERATION III—THE NEW MECHANICS OF SPACS .. . . . . . . . . . . . . . . . . . . . . . . . . . 10

BY DOUGLAS S. ELLENOFF, ESQ. – ELLENOFF GROSSMAN & SCHOLE LLP

MIDDLE MARKET UPDATE 4TH QUARTER 2010

Copyright 2010 Bryant Park Capital, Inc. 1

ECONOMIC OUTLOOK: U. S. GDP EXPANDS FOR THE FIFTH CONSECUTIVE QUARTER,

ALTHOUGH STEADY UNEMPLOYMENT PERSISTS

During the third quarter of 2010, U.S. Gross Domestic Product (GDP) expanded for the fifth consecutive quarter, albeit at a relatively slow pace. According to the Bureau of Economic Analysis, GDP grew at an annualized rate of 2.0%, following increases of 3.7% and 1.7% in the first and second quarters of 2010, respectively. Most economists, however, focused on the inability of the sluggish pace of growth to generate enough demand to put downward pressure on the nation's relatively high unemployment rate. The third quarter growth, which was in-line with economists’ forecast, resulted primarily from increased private inventory and business investment, government spending, non-residential fixed investment, consumer spending, and exports. GDP growth was partially offset by an increase in imports and a decline in residential

fixed investment.

Consumer spending, which accounts for approximately 70% of the U.S. economy, increased by 2.6% in the third quarter of 2010. This increase was the highest in almost four years and above the 2.2% uptick experienced in the second quarter. Although a

positive movement in consumer spending usually serves as a leading indicator of economic recovery, it has not aided in lowering U.S. unemployment figures, and a recent poll by CNN indicated that eight in ten Americans say that the economy is still in poor shape.

Inventory levels and business investments both increased during the third quarter, contributing to the slight rise in GDP. In other areas of the economy, exports and imports increased by 5.0% and 17.4%, respectively, and government spending increased at an annual rate of 8.8%. Overall net trade activity, however, had an adverse effect on GDP given that U.S. imports far exceeded exports. Non-residential fixed investment increased by 9.7%, following a 17.2% increase in the second quarter of 2010.

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FIGURE 1: REAL GDP GROWTH SINCE 2005

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According to the U.S. Bureau of Labor Statistics, the national unemployment rate as of September 2010 held steady at 9.6% for the second straight month, marking the 14th straight month at 9.5% or higher. A broader gauge of employment, however — the under-employment rate — increased to 17.1%. Under-employment encompasses people who have resorted to part-time work or those who have given up looking for a job. Hiring activity declined in the construction and government sectors, while non-farm payroll, a telling coincident economic indicator, saw a decrease of 95,000 jobs. This reduction was largely attributable to the layoff of 77,000 temporary 2010 Census workers. On a positive note, private sector hiring continued its trend upward, slightly offsetting other declines for the month. The private sector added 64,000 jobs in September 2010, despite business demand for labor remaining sluggish.

The U.S. housing industry experienced its worst summer in more than ten years, even though mortgage rates were at their lowest levels in half a century. Feeble economic conditions continue to thwart any robust recovery in the housing market, and the existence of tight credit markets, high foreclosure rates, and a lack of income likely will hinder American home ownership in the fourth quarter. According to RealtyTrac, foreclosures jumped to 338,836 units or 2.5% in September, as compared to August of 2010. Since the start of the year, banks have seized over 800,000 homes nationwide, and are on pace to appropriate more than one million by year-end.

During the third quarter, S&P corporate earnings surpassed quarterly projections. Of the 159 S&P companies that have reported second quarter earnings, 83% have exceeded projections, while only 11% fell below analyst estimates. Major financial firms such as J.P. Morgan, Goldman Sachs, Bank of America, and Wells Fargo beat analyst expectations. Morgan Stanley was an outlier, however, as it reported earnings below estimates, largely due to a decline in trading revenue and a $229 million loss from its stake in casino developer Revel Entertainment.

Optimism over the possibility of further quantitative easing by the Federal Reserve (which subsequently occurred) resulted in a positive third quarter for the public markets. The Dow Jones and S&P 500 indices increased 11.0% and 3.6%, respectively. Crude oil, continuing its upward trend, ended the quarter at just over $76 per barrel, an 11.6% increase from the prior year’s third quarter-end. According to Thomson Reuters, field maintenance in the North Sea, production disruption in Nigeria, Angola, and Iraq, and a very active hurricane season in the U.S. have limited the availability of crude oil.

During its meeting on September 21st, the Federal Reserve decided to keep the fed funds rate at near zero, the same rate set since December of 2008, for an extended period of time. Although household spending has increased, the Fed maintained a modest outlook for the economy, as it said that it will continue reinvesting principal payments from its securities holdings. On November 3rd, the Fed announced it will initiate a $600 billion bond-buying program to help stimulate the economy.



OUTLOOK FOR 2010

According to the third quarter CEO Economic Outlook survey published by the Business Roundtable, America’s top CEOs expect an increase in capital spending over the next several months along with a rise in future demand. Nevertheless, concerns remain over low sales and poor employment statistics. Overall, the CEO Economic Outlook Index declined to 86, slightly lower than the figures seen in the second and first quarters of 2010 of 94.6 and 88.9, respectively. Index readings of 50.0 or higher are consistent with economic expansion.

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FIGURE 1a: CEO ECONOMIC OUTLOOK INDEX

Source: Business Roundtable

The impact of the financial crisis has been felt worldwide. Last year was the first since the Great Depression that the economic output of the entire world declined. Countries around the globe, including the U.S. and China, are depressing their interest rates and/or currencies in order to spur their exports, thereby threatening to prompt a global currency war. Unfortunately, as the economist Paul Krugman once said, “there isn’t another planet to export to.” On October 5th, Goldman Sachs said there is about a 25% to 30% chance the U.S. economy will lapse back into a recession.



MERGERS & ACQUISITIONS: SUCCESSFUL HOSTILE TAKEOVER BIDS AND EMERGING MARKETS

ACCOUNT FOR THE LARGEST ACTIVITY

According to Zephyr (a database of M&A, IPO, and venture capital deals), announced M&A deals in the U.S. rose 13% to $168.2 billion in the third quarter, up from $148.7 billion in the third quarter of 2009. In terms of deal volume, however, there was a 25% decrease, with only 1,715 transactions announced in the third quarter of 2010, as compared to 2,286 announced deals in the same period of 2009. A notable and recent trend has been that buyers are finding it easy to persuade shareholders in target companies to agree to offers that lack the recommendation of the seller’s board of directors – otherwise known as hostile bids. Based on Dealogic's year-to-date figures, 82% of all hostile bids have been successful, the highest in the new millennium. The highest profile bid in North America during the third quarter was the announced $40 billion hostile takeover for Potash Corporation of Saskatchewan by BHP Billiton that ultimately was rejected in early November not by Potash shareholders, but by the Canadian government on national grounds. Other notable deals for the quarter included Intel Corporation’s acquisition of McAfee Inc. for $7.9 billion and Air Products and Chemical Inc.’s proposed acquisition of Airgas Inc. for $7.4 billion.

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FIGURE 2: U.S. M&A ACTIVITY

Transaction Value ($ billions) No. of Transactions

Source: Thomson Reuters

The pickup in M&A activity has been attributed to several key factors, including: (i) improvements in the corporate financing markets – specifically in the investment grade



segment of credit structure; (ii) a further reduction in the cost of funds; (iii) continued low interest rates – the Fed in its most recent meeting assured markets that the fed funds rate would remain low for an extended period of time; (iv) the pending (though now less likely) expiration of the Bush tax cuts that would mean, inter alia, an additional five percent or more in the federal capital gains tax rate for parties delaying closing past year-end; and (v) record amounts of cash held by companies – according to the Federal Reserve, corporate liquid assets comprise over 6.1% of total business assets, just below the 6.2% level recorded in the first quarter of 2010, when companies had the largest share of assets in cash since the early 1960s. In fact, the 1,000 largest non-financial services firms worldwide have amassed about $2.9 billion in cash and equivalents, according to Bloomberg. High unemployment, slow domestic growth, and uncertainty surrounding the November mid-term elections all have contributed to conservative cash management practices.

In September, Ernst & Young conducted a business confidence survey, Capital Business Barometer, of over 1,000 senior executives worldwide, revealing that 28% of companies are likely to begin executing transactions over the next six months. Furthermore, 75% of companies stated that organic growth represented their top capital allocation priority going forward, as firms seek to restructure and improve performance. According to the survey, 31% of the respondents would consider pursuing M&A activity in the next six months in emerging markets, as entities look for competitive advantages and resources in fast growing economies.

During the third quarter, the Asia-Pacific region led the momentum with a 54% increase in deal volume compared to the third quarter of 2009, followed by South America (52%), North America (40%), and Europe/Middle East/Africa (28%). The average deal size in the third quarter was up 6% from the second quarter, with the largest increases seen in deals in emerging markets. In the aggregate, in the first three quarters of 2010, the average deal size was up 13% globally from the same period in 2009. According to data from Thomson Reuters, during the third quarter, the global merger and acquisition volume increased by 21% to $676.9 billion, as compared to the second quarter of 2010.

PRIVATE EQUITY: BOOM TIME MULTIPLES FUELED BY INCREASED SECONDARY SALES

ACTIVITY

According to Dealogic, the announced leveraged buyout (LBO) volume in the U.S. year-to-date rebounded to $53.9 billion, approximately 50% higher than the announced LBO volume in the whole of 2009. Nearly 50% of announced deals, globally, were LBOs that accounted for more than 60% of the aggregate deal value worldwide during the quarter. The positive trends were mainly a result of improved accessibility to corporate financing, higher company transaction valuations, and sharp declines in default rates, which have allowed PE firms to refinance large portions of debt otherwise coming due over the next several years.



Transaction prices paid by buyout firms increased from those posted in the second quarter of 2010. On average, firms have paid 7.7 times earnings before interest, taxes, depreciation, and amortization (EBITDA) for deals valued from $250 million to $499 million. The need

for PE firms to invest their remaining capital commitments continues to serve as a spur for higher multiples. Furthermore, firms have been willing to pay a premium to acquire strong businesses that had successfully weathered the recession. (It is important to note that the 7.7 multiple reflects prices paid for mainly large public companies and does not account for smaller private company transactions [for which there are no publicly available data] that tend to trade at lower multiples.)

A trend that many believe has contributed to these recently higher multiples has been the elevated activity in secondary sales among PE firms, where a private equity firm buys an asset from a PE peer. According to Preqin, this year PE firms already have announced 128 secondary LBOs worldwide valued at $35.3 billion, up from $9.9 billion for all of 2009. In North America, secondary transactions accounted for almost 20% of all buyouts in value, more than double the level of just three years ago. According to internal research by Pantheon Ventures, an investor in more than 1,000 PE funds, overall returns from secondary buyouts are similar to returns achieved in primary deals.

PE firms also have obtained liquidity through the payment of dividends that have been financed by taking advantage of low rates and easier credit. According to Standard & Poor’s, 56 PE-supported companies have issued about $23 billion in dividend debt this year. On average, these dividends have allowed the PE firms to recoup almost all of their original investment.

Another industry trend has been an increased focus on public company acquisitions, whose popularity has been driven by the more realistic valuation levels seen in the last two years. According to Preqin, 23% of the capital invested in LBOs in the third quarter of 2010 targeted public-to-private deals, whose volume levels are nearly double those seen in 2008, when stocks dropped precipitously. The $4.7 billion acquisition of Dynegy, Inc. by Blackstone Group,

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FIGURE 3: TOTAL DISCLOSED LEVERAGED BUYOUT TRANSACTION VALUE

* YTD as of September 13, 2010Source: Dealogic

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announced in August, represented the biggest public-to-private transaction for the third quarter. Also in August, 3G Capital took Burger King Holdings Inc. private in an LBO valued at $3.3 billion.

According to Pitchbook, 97 exits were achieved during the third quarter for an aggregate value of $16.8 billion, of which 61 were sales to strategic buyers, 27 were secondary sales, and the remainder was IPOs. As a result of PE firms’ having delayed sales of their aging portfolio investments, the average holding period has increased to 4.9 years. In light of the rise in company valuations and the more favorable debt markets, an increase in exit volumes may be expected in the near term. Given that PE firms also face time pressures to invest dry powder, a theme common throughout the industry, research analysts believe the second half of 2010 will see more announced deal flow than in the first half of the year.

PE firms are sitting on an estimated $469 billion in existing capital commitments, according to Preqin. At the current investment pace, it would take more than seven years to invest this capital assuming that, on average, funds borrow half of the purchase price. Even so, much of this capital must be spent in the next year or two, or the funds risk having to return their unused capital to their limited partners. All things being equal, this dynamic should turbo-charge M&A activity in 2011.

Sixteen PE funds raised a total of $20 billion in the third quarter, which is a small amount by recent standards, but still a 33% increase in the number of funds closed, as compared to the same period last year. Unlike in 2009, there has been no mega-fund raising activity (>$6 billion) in 2010 so far. The largest fundraising activity in the third quarter was: (1) Morgan Stanley Real Estate Fund Global VII, $4.7 billion; (2) Oaktree Capital Management Opportunities Fund VIII, $4.4 billion; (3) Energy Capital Partners II, $4.3 billion; (4) Madison Dearborn Capital Partners VI, $4.1 billion; and (5) Alinda Infrastructure Fund II, $4.0 billion.

VENTURE CAPITAL INVESTING

According to the Money Tree Report from PricewaterhouseCoopers, venture capital (VC) capital investments in the third quarter of 2010 decreased 31% to $4.8 billion invested across 780 deals, as compared to $6.9 billion invested across 962 deals in the second quarter of 2010. The decrease in total dollars invested was primarily due to weakness in the clean technology sector, a large target industry, which had temporarily driven up VC investments in the second quarter. Venture investors also continued to show strong interest in start-up or first-time deals as compared to follow-on rounds, reflecting an innovative and early stage appetite. Companies receiving venture capital for the first time accounted for 26% of all dollars invested and 33% of all deals in the third quarter, as compared to 15% of all dollars invested and 25% of all deals in the same period last year. The most sought after industry for investment during the third quarter was the software industry with $1.0 billion invested.

Venture-backed company exit activity reflected a slow and steady recovery in M&A and IPO activity during the third quarter of 2010. There were 14 venture-backed IPOs valued at $1.2 billion, representing slight declines in both deal volume and offer amounts, as compared to the



second quarter of 2010, in which 17 deals were consummated with an aggregate value of $1.3 billion. The largest venture-backed IPO was by Green Dot Corporation, a provider of retail-based financial debt card services that raised $164.1 million. There were 104 acquisitions representing an average disclosed deal value of $142.3 million, up 7% from the second quarter of 2010 and more than double the average disclosed deal value in the third quarter of 2009. The largest venture-backed deal of the quarter was Alcon Inc.’s acquisition of LenSx Laser, Inc., a developer of surgical lasers, valued at $750 million.

According to Thomson Reuters and the National Venture Capital Association, 45 U.S. venture capital funds raised a total of $3 billion in the third quarter, a 40% increase over the second quarter of 2010, during which time 51 funds raised a total of $2.1 billion. VC fundraising activity remains sluggish, with fewer numbers of VC funds raising smaller funds. Raine Partners L.L.P. successfully raised $303.4 million, making it the largest new fund reporting commitments in the third quarter. Institutional Venture Partners XIII, L.P. and Third Rock Ventures II, L.P. represented the largest funds raised during the third quarter, at $750 million and $426 million, respectively.

PIPE INVESTING

During the third quarter, companies raised $6.4 billion across 244 private placements, as compared to $8.4 billion across 299 transactions in the third quarter of 2009. Third quarter results exclude PIPE investments made into foreign companies that are not listed on U.S exchanges or into companies that raised less than $1 million. The weak performance in PIPE activity was due largely to concerns surrounding the general economy and uncertainty in the political environment pertaining to the November congressional elections. Moreover, many issuers already had raised sufficient capital earlier this year when PIPE investment activity was

high, especially in the first quarter of 2010. During the third quarter, issuers also were reluctant to raise capital when investors still were seeking steep discounts to market on valuation.

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FIGURE 4: U.S. PIPE ACTIVITY

Capital Invested No. of DealsSource: PrivateRaiseSource: PrivateRaise



players, were among the most active PIPE issuers in the third quarter, according to PrivateRaise. Healthcare related companies issued 56 private placements and raised $679.9 million. Technology companies were a distant second, raising $327.6 million across 35 private placements. Among investors in the PIPE market, Downsview Capital and Hudson Bay Capital Management were the most active, having committed a total of $7.9 million and $2.4 million, respectively.

DEBT CAPITAL: HIGH YIELD DEBT A CATALYST FOR THE U.S. DEBT CAPITAL

MARKET

After a weak showing in the second quarter of 2010, the debt capital markets experienced a strong rebound in deal activity, mainly due to record quarterly volume in the U.S. high-yield market. In the third quarter of 2010, U.S. companies issued over $70 billion in high-yield paper. Sales of so-called junk bonds, or speculative-grade debt, already have surpassed the total amount sold in all of 2009. Firms have issued $187.4 billion year-to-date, as compared with $147 billion in all of 2009. Fitch Ratings expects that future demand will be driven largely by the refinancing of existing debt, extension of debt maturities, and financing of M&A and LBO deals. According to data from Barclay’s Capital, high-yield bonds returned 6.7% in the third quarter of 2010 and are already up 11.5% year-to-date. Credit quality continues to improve in the high-yield market, while default rates dropped significantly to 4.6% from a record of 15.7% in late 2009.

According to Thomson Reuters, during the first nine months of the year, U.S. investment grade issuance decreased 1.0% to $561 billion in 623 deals, as compared to the same period last year, but increased 110.6%, as compared to the second quarter of 2010. This is the highest quarterly volume increase since the second quarter of 2008. Issuers have been taking advantage of record-breaking low coupon rates. Investment grade corporate bonds provided an excess return of 144.0 basis points (bps) over U.S. Treasuries in the third quarter, and the average spread for all U.S. investment grade issuances has tightened to 169.7 bps so far this year, down by almost half from the 317.6 bps recorded at the height of the financial crisis.

During the third quarter, the number of loans backed by the Small Business Administration (SBA) continued to rebound nicely, thanks to the establishment of the American Recovery and Reinvestment Act of 2009. Over $22 billion in dollar value representing 54,833 loans were backed by SBA, helping small businesses through its various loan programs. This was a significant increase in activity from 2009, when $17 billion was deployed across 47,897 loans. The success was attributable to fee reductions and higher loan guarantees that were available through the Recovery Act. Additionally, loan enhancements were extended in the Small Business Jobs Act, which allowed the SBA to approve another $14 billion in small business lending.



According to GE Capital Markets, September figures in the leveraged loan market were the highest in 36 months. Leveraged loan volume aggregated $162 billion in the first nine months of 2010, as compared to roughly $49 billion in the same period in 2009. Leveraged loan activity already has exceeded the full-year 2009 amount of $77 billion. While there have been dramatic improvements from 2009, activity is still far less than the pre-crisis levels of over $500 billion. According to a recent Bank of America report, after a slow start in May and June, the leverage loan markets have rebounded in recent months, attracted by higher yields and bond fund inflows that followed the easing of the European credit crisis.

CONCLUSION

The markets remain skittish over high unemployment, consumer cautiousness, and potential currency wars. Nevertheless, the U.S. stock market has recovered much of its lost ground, and ample capital is available for investment from PE firms and public corporations. The strong performance of quality companies and shakeout among weak performers should buoy M&A and corporate financing activity over the next 12 months, along with continued government spending worldwide to spur the global economy.

FEATURED ARTICLE: GENERATION III—THE NEW MECHANICS OF SPACS

by Douglas S. Ellenoff, Esq. – Ellenoff Grossman & Schole LLP

A SPAC (a Special Purpose Acquisition Corporation) is a newly-formed corporation by a prominent and qualified sponsor/management team for the purpose of raising capital in an underwritten initial public offering (“IPO”) in anticipation of identifying and consummating a business combination. Oftentimes, the SPAC is focused on a particular industry due to the expertise of the sponsor/management team. Pending the approval and closing of the business acquisition candidate, the IPO funds remain in a trust account for the benefit of the shareholders. The amount held in trust is 100% or more in most cases. For potential private company targets, SPACs offer the opportunity for a reverse merger, access to capital markets to spur future growth, and strategic resources and insight of the SPAC founding management team. Typically, the IPO consists of the sale of units, consisting of both a share of common stock and a warrant. Shareholders who do not want to participate in the future business opportunity may request a return of their capital and keep the accompanying warrant.

Due partly to the protection provided to investors, SPACs have seen a dramatic increase in popularity over the last decade. Since 2003, 161 SPAC IPOs have been underwritten in the U.S., raising over $20 billion in the process. Of those SPACs, approximately 45% closed an acquisition, 30% returned capital to their shareholders, and the remaining 25% are still outstanding. Some of the issues plaguing the early SPACs were a lengthy SEC review/approval process and the involvement of hedge funds that bought shares in secondary trades below the net asset value of the SPAC and then voted against a pending deal, effectively forcing the SPAC to return its capital.



As with any new financing vehicle, SPACs have evolved based on market feedback. Generation I SPACs (through 2000) were replaced by Generation II SPACs (through 2008), which in turn now have been replaced with Generation III SPACs. While the 2010 SPACs are conceptually similar to older versions, the 2010 SPACs have been restructured to respond to many of the issues that presented themselves in the nearly 50 SPAC acquisitions consummated during 2008/2009. The third generation structure is worth reviewing on its own merits. This isn’t to say that everyone will necessarily be a convert, but we believe that it deserves attention. Whether for a potential sponsor of a SPAC IPO, an investor in a SPAC, or a seller of a business to a SPAC, many features of the old program have been modified to make the vehicle more attractive to each of those constituent parties.

Generation III SPACs originated with 57th Street General Acquisition Corp., which was sponsored by Mark Klein, who had been the sponsor of an earlier Generation II SPAC— Alternative Asset Management Acquisition Corp., which successfully completed its SPACquisition in 2009. 57th Street raised approximately $55 million. The objective in structuring 57th Street was to balance the varied and disparate interests of the three primary constituents (sponsors, investors, and targets). This article summarizes certain of the primary modifications first introduced to the SPAC program in 57th Street and why we believe that these changes are beneficial.

Central to the success of the SPAC program has been and continues to be the commitment to maintain nearly all of the raised capital in a trust account and to permit investors a return of most, if not all, of their capital if they so choose. Generation III maintains the same procedural safeguard for investors, but rather than achieving this result via a shareholder approval process, the SEC has agreed to permit the use of a tender offer process—which ought to be a faster process with the SEC (20 days by statute, although we believe it may go longer) and, therefore, a faster pathway to closing any proposed business transaction than having to file a proxy with the SEC and obtain and respond to comments. Avoiding the shareholder approval process eliminates the need to obtain a majority vote and, therefore, provides a clearer path to closing a deal from structural and regulatory perspectives.

One of the issues that caused significant procedural problems in the consummation of the 2008/2009 proposed business combinations was a provision that was commonly referred to as the redemption threshold. The redemption threshold, which was unique to SPACs, mandated that a business combination could not proceed if more than 30% (which varied deal by deal) of the shareholders voted against a transaction and requested their capital be returned. In 2008/2009, most SPACs shareholder bases shifted to “yield investors,” who were purchasing SPAC shares in the open market at nearly a 10% discount to the SPAC’s NAV and seeking an arbitrage opportunity. These investors were only really interested in voting against a transaction and asking for the redemption of their common stock at 100% of NAV, as the SPAC trusts were invested in U.S. Treasury securities. So even though there might have been new investors (fundamental investors) prepared to purchase those shares, certain transactions did not have the opportunity to close due solely to the procedural aspects of the old SPAC structure.



While the new tender offer feature provides investors with the same practical opportunity to have a return of their capital, it eliminates the redemption threshold entirely. Additionally, the tender offer process is mandated to be a quicker process for the return of the capital. The tender offer process, however, doesn’t address the commercial reality that none of the constituent parties will know whether the investors will support the proposed transaction by not tendering and how much of the trust funds will remain—this is a commercial issue to be resolved by the SPAC, the target, and the investors. Nonetheless, the investors can maintain their investment or have their funds returned. In addition, they retain a warrant in an entity that ought to be able to consummate a transaction more easily, and thereby have increased value rather than have a failed business combination and liquidation—so the Generation III structure is a positive for investors.

One of the other main issues present in the Generation II SPACs that needed attention was that many targets were not inclined to entertain a transaction with a SPAC given the dilutive nature of the then sponsor promote, consisting of common stock and warrants (20+%), as well as the below market exercise price of the one-to-one warrant coverage included in the SPAC IPO. The substantial dilution resulted in many quality targets’ unwillingness to contemplate a transaction with a SPAC or, for those that would, a complicated and sensitive restructuring of the economics of both the sponsor and the investor. In most of the Generation III SPACs, the sponsor’s promote has been halved (although there may be an additional promote earned over time if the subsequent stock price increases), and the investor’s warrants are structured to be exercisable at above-market prices. As a result of these changes, which are actually consistent with where many of the 2008/9 SPACquisitions ended up after restructuring, many targets perceive that the Generation III SPACs to be worthy of consideration as an alternative to a traditional underwritten IPO.

For sponsors, a benefit of the Generation III SPAC is that they have far greater certainty of closing a transaction, since the new structure permits the elimination of the shareholder approval process and the redemption threshold. Although the new Generation III SPAC has the flexibility of eliminating the shareholder vote from a securities law perspective, the structure of the transaction and the laws relating to the state of incorporation may nonetheless require the shareholder approval process. The re-pricing of the warrants at above-IPO levels, as opposed to the old structure, where the exercise price was at a 20% to 25% discount, means a transaction is also more likely to be accepted by the markets. Given that the sponsors of a SPAC have capital at risk in the range of 3% to 5% of the capital raised in the IPO, having the ability to close a transaction in less time, with greater certainty and fewer structural issues to modify at the time of the tender, is a meaningful benefit. The at risk capital of the sponsors is contributed at the time of the IPO in a contemporaneous financing, and that capital pays for the expenses of the offering (i.e., underwriters’ discount, legal and accounting fees, printing costs, filing fees, etc.) and is the mechanism that permits the trust account to be nearly equal to all of the IPO proceeds. In return for the sponsors’ investment, they receive the promote package mentioned above (consisting of both common stock and warrants), which only has value if they



consummate a business transaction, so removing both procedural and commercial obstacles is critical to improving the SPAC program.

Since the success of 57th Street, there have been two additional SPAC IPOs in 2010—Hicks II, which raised $150 million, and Cazador, which raised $40 million. As of the writing of this article, there are three additional SPAC sponsors on the road marketing their offerings. Interest in the Generation III SPAC program has meaningfully increased since the summer, with several other filings submitted to the SEC, as well as other new SPAC structures with interesting variations of certain of the terms. What is clearly apparent is that there is an interest by both sponsors to raise blind pool capital and investors to support those managers—the issue from here is how attractive the new structure is to potential targets. For now though, the Generation III SPAC has recaptured the capital markets’ attention.

Ellenoff Grossman & Schole LLP is a mid-sized New York City-based law firm, offering its clients legal services in a broad range of business and litigation related matters. Douglas S. Ellenoff, a member of the firm since its founding in 1992, is a corporate and securities attorney with a specialty in business transactions and corporate financings.

In the last several years, he has been involved at various stages in numerous registered public offerings, including 30 financings and, with other members of his firm, over 100 private placements into public companies, representing either the issuers of those securities or the registered broker-dealers acting as placement agents. Along with other members of his firm, Mr. Ellenoff has been involved at various stages with over 50 SPACs, 17 of which have consummated their IPOs, raising over $1.5 billion. He also provides counsel with regard to their respective ongoing (SEC, AMEX, and NASD) regulatory compliance.

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