$CNGL: the final nail in the SPAC coffin?

Last week I saw one of the weirdest things I’ve ever seen in the corporate markets. Because it was so small (extremely small; ~$10m market cap. Stock is currently halted and I’d guess it will remain so for a long time, but given that insanely small size and the overall insanity going on here, I’ll refer you to our legal disclaimer and remind you to do your own work / consult an advisor / this certainly isn’t investing advice!) and related to a SPAC, I didn’t see anyone really comment or report on it (aside from a few shareholders who were blindsided by it), but it’s so strange that I wanted to shine a small light on it. I’ll note upfront I have no dog in this fight (i.e. no position in the company); it’s just so strange I wanted to put something out there and see if I was missing anything. Also, while the deal is (very) small, I think it has ramifications for the larger SPAC universe (which is also pretty darn small these days), so between how interesting it is and the effects it could have on a broader universe I thought it was worth highlighting.

Here’s the background: when you raise a SPAC, you place all the money you raise in a trust. So if you raise $200m, you place all of that money in trust. The SPAC then goes and tries to find a deal that shareholders like. Eventually, the SPAC finds one and brings the deal to shareholders, and shareholders vote on the deal. If shareholders like the deal, they can chose to roll their money into the new company. If they don’t like the deal, they can get their money (plus any interest it’s accrued while sitting in trust!) back.

Traditionally, that “money in trust” has been inviolate. I could be wrong, but I don’t believe there’s been a single case of a SPAC “breaking trust” and returning less than the money it raised when shareholders have redeemed. And it makes sense that SPACs wouldn’t break trust: SPACs are basically cash shells, so they have no real ongoing business expenses, and the SPAC sponsor puts in enough cash to cover day to day admin when they form the SPAC. Not having SPACs break trust also makes sense from a game theory perspective: while any individual SPAC sponsor might be a one time player in the SPAC world, the SPAC advisors (i.e. bankers and lawyers) are all repeat players, and in order for any investor to care about the game (i.e. invest in SPACs) it’s critical for investors to feel confident that the SPAC’s trust won’t get broken. So it’s in the advisors best interests to make sure that the SPAC trust is inviolate in order to ensure the game keeps getting played (and fees keep getting spun up!).

You can probably guess where this post is going: last week, a pre-deal SPAC, Canna Global (CNGL), filed an 8k that noted they had agreed to issue some shares as part of a deal to cover their deferred underwriting fees. It appears that CNGL thought the shares would not be tradable / exercisable until after their deal went through, but the buyer did not agree and sold 724k shares into the open market.

Why is that an issue? Again, CNGL is a pre-deal SPAC. At Q1’24, they had ~1.1m shares out that are redeemable, and those shares were backed by $12.5m in trust (~$11.27/share). Post share issuance / sales, there are an extra ~725k shares on the market from the new shares that just got sold. Given CNGL is pre-deal, those new shares are still eligible for redemption….. but there was no corresponding increase to CNGL’s trust account when these shares got issued. So, if those share sales stand, all of the sudden you’d have ~1.8m shares with a claim on that ~$12.5m in trust, resulting in a redemption value of ~$7/share.

What happens next? I have no idea. It seems pretty clear to me that these new shares shouldn’t have been sold (CNGL issued them to settle the deferred underwriting fees they owed from the IPO, and you can read the prospectus or any of CNGL’s filings and it’s pretty clear deferred underwriting fees should only get paid after a business combination / after redemptions have been paid out (i.e. “The underwriters have agreed to waive their rights to their deferred underwriting commission (see Note 6) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period, and, in such event, such amounts will be included with the other funds held in the Trust Account that will be available to fund the redemption of the Public Shares.”)…. but the fact is the shares were sold, so with that genie out of the bottle I’m really not sure what happens next (I have some moral thoughts on who should do what and ethically what would make sense, but this is a distressed SPAC and I understand morals and ethics matter a lot less when you start talking about multi-million dollar distressed windfalls).

Anyway, I have no dog in this fight; I’m not involved here and I haven’t been involved in SPACs in quite sometime (which is really a shame; the pre-bubble / COVID SPAC market was pretty sleepy but offered really astounding risk/reward). The stock is halted, and will likely remain halted till they figure all of this out. So I’m just a curious onlooker…. but I do find it fascinating, and I’d love to hear from others if they have a different read on any of the ongoings here.

I will tell you this: on Friday afternoon, a broker emailed me asking if I was interested in a new SPAC that was coming with “great terms” (his words, not mine!). The answer would have been no either way, but given the CNGL news I basically laughed him out of the room; I don’t know how anyone could invest in pre-deal SPACs when there’s even a chance of this type of rug pull happening (whether they should invest in SPACs is another story!).

SPACs have been dying since the 2021 bubble popped, but a few were still getting done here and there…. as it stands, I wouldn’t be surprised if CNGL was the final nail in the SPAC coffin. How could any serious investor buy a SPAC IPO if the trust isn’t inviolate? Who wants to get cash like returns with the downside risk of someone messing up and blowing up 25%+ of your trust?