Writing Blank Checks

There have been many critics of the recent boom in SPAC filings, particularly given that the asset class is the historical home of hucksters and con artists. After all, these vehicles literally have the words “blank check” in their S-1 filings.

But it finally may be time to reign in the catcalls, since many respected investors are using SPACs to sidestep what has become a very difficult IPO environment for small companies (particularly for small medical companies). The latest example came yesterday, when Ithaka Acquisition Corp. (OTC BB: ITHK) agreed to acquire Alsius Corp., an Irvine, Calif.-based developer of catheter products to control patient temperature in hospital critical care settings.

Alsius competitors include Radiant Medical, InnerCool Therapies, ice cubes and heat lamps. It had filed for a $100 million IPO in April, then received and responded to some SEC comments and finally was told by its bankers to wait until fall to attempt pricing. During that waiting period, Alsius was introduced to Ithaka and eventually opted to do the deal – even though it resulted in a “crushing” of its VC valuation.

Paul Brooke, a co-founder of Ithaka and a venture partner with MPM Capital, says that SPACs are “a mechanism that can insert themselves into the process for small medical companies that are ready to become public, but which cannot because the IPO mechanism is broken.” Brooke believes that this break has been caused by many factors, including: (1) The Spitzer-induced Chinese wall between research analysts (who understand med-tech) and bankers (who don’t); and (2) The fact that hedge funds are now playing a much larger role in IPO pricings, at the expense of more patient mutual funds.

There is certainly an argument to be made that companies like Alsius shouldn’t be going public in the first place, particularly if they can’t make a profit after more than a decade in business and nearly $100 million in VC funding. But both Brooke and Alsius CFO Brett Scott insist that such a move is critical to the company’s growth, since it provides certain financial options that would not be available otherwise (no preferences, for example).

More of these deals are certainly coming, at least judging by the continuing parade of new SPAC offerings from established VCs and PR pros. The ultimate test, however, will be twofold. First, do the acquired companies succeed? Second, do VCs have enough faith in SPACs to continue funding early-stage med-tech companies that have dwindling opportunities to go public by traditional means?