Bill Ackman is still tinkering with his SPARCs.

In a new S-1/a filed this morning, the Pershing Square founder provided an update to his proposed model that is “not a SPAC”, but that would do some SPAC-like things. In a simple sense, Ackman is seeking change in the order of operations from: find investors, raise capital, IPO, find deal, close deal, to: find investors, find deal, raise capital, close deal, IPO.

Ackman first hatched the concept in June 2021 as a means of distributing shares from Universal Music Group’s (AS:UMG) Amsterdam IPO to investors in his Pershing Square Tontine SPAC, while also keeping the vehicle alive as a means of completing another later deal. This appeared to have been met with a cold reception from both regulators and investors at the time, but Ackman has persisted in trying to make SPARs, or special purpose acquisition rights, a reality as a standalone concept.

The most noteworthy new change to the S-1 is language that works to elide some of the issues that Ackman’s first joust aroused. Despite terminating the Universal deal, PSTH was sued by a former SEC commissioner and a law school professor alleging that Pershing Square Tontine should be subject to rules governing investment companies under the Investment Company Act of 1940. The legal community fired back with 49 law firms (eventually more than 55) circling the wagons to argue against this line of reasoning.

To refresh on how the concept’s re-jigged order works, it effectively reverses one of the trickier features of a traditional SPAC, particularly in the current market – redemptions. Investors under this scheme would not be entrusting capital to Ackman’s vehicle until a deal is found and either taking it back or leaving it in. Instead, investors are holding a free ticket to the show that they only pay for if they opt in to going.

This idea has now been through several revisions and although Pershing Square Tontine liquidated in July 2022, the SPARs will still be distributed to its original investors. The structure in this latest S-1/a features are mechanically similar. The scheme would distribute 50,000,000 SPARs to the liquidated SPAC’s former shareholders of record and 11,111,111 to former warrant holders, for a total of 61,111,111.

Once a target is found and a definitive combination agreement signed, these SPARs would become tradable for the first time on the OTC Markets for 20 business days. Called the “Election Period,” this is when investors would elect to exercise and effectively fund their SPARs at $10 per SPAR, but Pershing Square may increase this exercise price and has set the minimum exercise proceeds at $1,222,222,220.

Once it was clear how much cash was in the pot, the target company would have 10 business days to decide whether to proceed. If it did, then the cash transfers from the exercised SPARs would take place over a five-day period and the deal would close with all unexercised SPARs expiring.

The thrust of the “SPARCs (and maybe SPACs) are investment companies” argument has to do with the length of time they hold investor cash, generally invested in government securities. The new SPARC S-1 states:

“We also believe that, even if we (i) elect to hold funds received in connection with the submission of Elections in such U.S. Treasury obligations and/or money market funds and (ii) are deemed as a result to be engaging primarily in the business of investing in securities, SPARC would likely qualify as a “transient investment company” under Rule 3a-2 under the Investment Company Act. The purpose of that rule is to provide temporary (one-year) relief from Investment Company Act registration for companies that could be deemed to be an investment company because of a temporary situation which (but for Rule 3a-2) would trigger Investment Company Act registration. Because under no circumstances will SPARC hold investor funds for longer than 10 months from the end of the Election Period, we believe SPARC would likely qualify as a transient investment company under Rule 3a-2. However, in the context of a novel vehicle such as SPARC, the SEC and/or private litigants may take a different view.”

In the legal world, it takes an obscure loophole to fight an obscure loophole, but it remains to be seen if this explanation would satisfy the SEC and litigants in question.

Although this battle will surely have several more rounds, the SPARC idea is beginning to feel a bit like a concept for a SPAC cycle that has already passed. One of the purported advantages of the SPARC approach would be the ability to right-size the capital raise to the deal once it has been identified and also dodge underwriting fees and warrant dilution.

Pershing Square Tontine experienced this issue itself, facing a narrow band of potential targets due to just how large it was having raised $4 billion in its IPO. It wasn’t alone as four of the nine SPACs that raised $1 billion or more in their IPOs (not counting over-allotment proceeds) since the start of 2020 ultimately liquidated. Four more completed deals and one, Churchill VII (NYSE:CVII), is still searching, but…is quickly approaching its deadline date of February 16, without an extension proxy filed.

The SPARC would come with a forward purchase agreement (FPA) of up to $3.5 billion, with Pershing Square funds committed to a minimum of $250 million. That is still an elephant gun – especially with $1.2 billion more in cash from SPAR investors – at a time when the flock of companies valued at that scale wanting to go public into this market is likely still sparse. However, the timing of Stripe announcing it’s looking at going public this year and Ackman re-filing his SPARC structure one week later is maybe or maybe not just a coincidence.

That beast of a target company would also have to be contented with trading on the OTC Markets for one year post-closing before they can uplist thanks to the seasoning rule.

But, with Pershing Square Tontine already liquidated, there is no longer a ticking clock on Ackman’s SPARC ideas. We’ll have to see how this and any further tweaks marinate with the SEC.