A six-year-old health insurance company called Clover Health is going public through a special purpose acquisition company. The new public offering comes as many traditional IPOs are being sidelined because of the COVID-19 pandemic. It also highlights the growing use of shell companies to go public faster and cheaper.
Clover Health offers Medicare Advantage health insurance plans, which weave together traditional medicine with fitness, vision, dental, and nutrition programs, to roughly 57,000 members in seven states. To raise money for Clover Health’s growth, venture firm Social Capital is taking the company public through a shell company called Social Capital Hedosophia Holdings Corp. III, which went public in April. The deal values Clover Health at $3.7 billion, according to Bloomberg.
This is not the first time that Social Capital has taken a company public through a special purpose acquisition company (SPAC). Founder and CEO Chamath Palihapitiya is making a habit of it. Just three weeks ago Palihapitiya used Social Capital Hedosophia Holdings Corp. II to acquire and take public real estate platform Opendoor in a deal valued at $4.8 billion. He set up a fourth SPAC in September and could set up as many as 26 (on his podcast, he said he has reserved stock market tickers IPOA through IPOZ). In an interview with Fast Company last year, Palihapitiya said he sees SPAC IPOs as a tool to get startups the money they need to compete for talent with tech giants such as Amazon, Google, Facebook, and Apple.
Palihapitiya is far from the only investor with an affinity for SPACs. In 2019, 59 SPACs went public and raised $13.6 billion, according to Barron’s. Those offerings accounted for one in four public offerings last year.
What is so attractive about going public through a SPAC? It boils down to a lot less paperwork. Since SPACs have almost no assets when they go public, there’s not much to report to the Securities and Exchange Commission. The money raised from the IPO goes into a trust, which stakeholders use to acquire an agreed-upon company. The chosen company gets to forgo the roadshow, the part of a traditional IPO where they have to present their business to an endless array of possible investors. The merger automatically takes the company public, allowing it to avoid much of the usual disclosure paperwork.
Despite fewer reporting requirements, it’s not necessarily cheaper, as Bloomberg‘s Matt Levine points out. SPACs still have to pay fees when they merge with the private company they want to take public. However, as the Harvard Business Law Review notes, the real savings are made in the ongoing regulatory reporting process. If a SPAC qualifies as an emerging growth company, it doesn’t have to disclose as much to the SEC for a period of five years. Regulatory compliance is expensive—this rule, a component of the Jumpstart Our Business Startups Act, or JOBS Act, softens that cost as a way to help bring more companies public. To be considered an emerging growth company, a company has to have less than $1 billion in annual revenue and less than $1 billion in debt that can’t be converted into stock. Social Capital III is already registered as an emerging growth company; so is Social Capital II, which acquired Opendoor.
Social Capital III raised $720 million when it went public in April. Since going public at $10 a share, the stock price has risen as high as $13 per share. As of this reporting, Social Capital III’s stock has fallen nearly 12%. This deal is expected to bring Clover Health $1.2 billion in cash.