RALEIGH – VinFast announced Friday morning that it’s going to sell stock in the U.S. as part of its $4.5 billion electric vehicle plant in Chatham County through a merger called a SPAC. The deal will generate some $27 billion, VinFast says. How does the process work?

Jim Verdonik, a veteran tech attorney of Innovate Capital Law in Raleigh who for decades as worked with companies from raising capital to mergers-and-acquisitions to initial public offerings. talked with WRAL TechWire about the process.

    • How does VinFast raise capital through a SPAC (Special Purpose Acquisition Company) work? 

SPACs start out with an amount of cash they raised from investors. The cash is sitting in an account that can only be used to pay compliance expenses and be given to the company the SPAC merges with. The articles say this SPAC raised $169 million when it did its IPO is 2021.  The industry norm is for SPACs to sell at $10 per share. SPAC investors who don’t like the merger can withdraw the money they invested for the same $1 per share, plus interest. They must make this decision before the stockholders meeting that approves the SPAC’s merger. If too many SPAC stockholders elect to have their shares redeemed, the merger usually falls apart, because the merged company wants that cash the SPAC is holding.

Jim Verdonik

The second way the SPAC raises money is that before the merger the company raises more money in a private placement – usually from institutional investors. The investors usually have the right to not invest if the SPAC merger does not close.  So, VinFast is out trying to raise money in a private placement now.

  • How does  a SPAC better serve VinFast than a traditional IPO?

The private placement VinFast is doing now can be done faster and with fewer expenses than for a traditional IPO. Also, IPOs create greater liability risk for both the company raising money and the investment bankers who help raise the money compared to the liability risk in a private placement. There are more defenses to liability risk in a private placement than in an IPO.  Finally, SEC review of financial statements in IPOs are very strict. This is less so in a SPAC deal where the only SEC review is of the proxy statement tat is sent to SPAC stockholders to approve the merger

  • How do companies set a value in a SPAC since neither company is worth on paper near $27 billion (including debt)?

The $27 billion valuation does not reflect any real valuation or appraisal of the company. The SPAC’s stockholders will only own 1% if the company after the merger. This 1% was negotiated between Vin Fast and the SPAC. Generally, SPACs have less bargaining power now than a few years ago when SPACs were hot. Now, Vin Fast can buy a SPAC cheaper than it could have a few years ago. One factor that affects the negotiation is the fact tha SPACS are required to give money back to SPAC stock holders if the SPAC does not complete a merger within a stated time after its IPO. This time period is usually 18 months to 24 months. The people who run the SPAC don’t like giving the money back. So, if the SPAC’s time period is running out soon, their negotiating power is decreased.

The $27 billion is simply the amount of cash the SPAC has now multiplied by 100.