Relativity Acquisition Raises $146 Million For Cannabis Target (NASDAQ:RACY)

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A Quick Take On Relativity

Relativity Acquisition Corp. (NASDAQ:RACY) has raised approximately $146 million, including underwriter over-allotment options from an IPO at a price of $10.00 per unit, according to the terms of its most recent S-1/A regulatory filing.

The SPAC (Special Purpose Acquisition Company) intends to pursue a merger with a company in the sectors of legalized cannabis industry, including related industries such as consumer packaged goods, health & wellness, technology, pharmaceuticals, manufacturing, distribution, logistics and brand management.

RACY has some interesting prospects, but the lack of a previous successful track record for management using a SPAC vehicle is a concern.

I’m therefore on Hold for RACY for the near term.

Relativity Sponsor Background

Relativity has 2 executives leading its sponsor, Relativity Acquisition Sponsor LLC.

The sponsor is headed by:

– Chairman and CEO Tarek K. Tabsh, who co-founded Oxford Cannabinoid Technologies, a UK pharmaceutical company, and co-founded Province Brands, a premium beverage company in Canada.

– Chief Financial Officer Steven Berg, who was previously CEO of NWT Holdings, a cannabis vaporization technology and consumer product company.

The SPAC is the first vehicle by this executive group.

Relativity’s Market

According to a 2021 market research report by Grand View Research, the global legal marijuana market was an estimated $9.1 billion in 2020 and is forecast to reach $60.4 billion by 2028.

This represents a forecast CAGR of 26.7% from 2021 to 2028.

The main drivers for this expected growth are growing demand from consumers as well as increasing legalizations in various countries and regions.

However, the global pandemic has served to disrupt established supply chains within the cannabis industry, reducing supplies during periods of lockdowns.

Also, below is a chart showing the historical and projected future growth of the U.S. legal marijuana market:

U.S. Legal Marijuana Market

U.S. Legal Marijuana Market (Grand View Research)

Relativity’s SPAC IPO Terms

Las Vegas, Nevada-based Relativity sold 14.375 million (12.5 million plus 1.875 million for underwriters) units of Class A common stock and one redeemable warrant at a price of $10.00 per unit for gross proceeds of approximately $146 million, including underwriter over-allotment options.

The IPO also provided for one warrant per share, exercisable at $11.50 per share on the later of 30 days after the completion of an initial business combination or 12 months from the closing of the offering and expiring 5 years after completion of the initial business combination or earlier upon redemption or liquidation.

The SPAC has 18 months to complete a merger (initial business combination). If it fails to do so, shareholders will be able to redeem their shares/units for the remaining proceeds from the IPO held in trust.

Stock trading symbols include:

Founder shares are 20% of the total shares and consist of Class B shares.

The SPAC sponsor also purchased 653,750 units at $10.00 per unit in a private placement. Each unit will be identical to the public units except for limitations on transfer; the units will have registration rights.

Conditions to the SPAC completing an initial business combination include a requirement to purchase one or more businesses equal to 80% of the net assets of the SPAC and a majority of voting interests voting for the proposed combination.

The SPAC may issue additional stock/units to effect a contemplated merger. If it does, then the Class B shares would be increased to retain the sponsor’s 20% equity ownership position.

Commentary About Relativity

The RACY SPAC is interesting because the SPAC’s leadership intends to avoid any plant-touching businesses.

Also, the firm may contemplate a merger with hemp-derived cannabidiol businesses.

The senior management team has extensive experience in the cannabis industry, with expertise in consumer-facing companies.

However, leadership does not have a track record when it comes to SPAC vehicles, which is a negative.

Investing in a SPAC before a proposed business combination is announced is essentially investing in the senior executives of the SPAC, their ability to create value, and their previous SPAC track record of returns to shareholders.

So, in a sense, investing in a SPAC can be likened to investing in a venture capital firm as a limited partner.

The cost of that investment is roughly the same, 20% of the upside to the SPAC sponsor, but the time frame for realizing a significant gain can be far faster, a 1- to 3-year time period for a SPAC versus 10 or more years for a typical venture capital fund.

Also, unlike a venture capital fund, a SPAC is liquid, providing public investors with an added liquidity benefit should they need to sell.

The global cannabis industry, and the U.S. industry as a subset, has shown strong growth as legalization efforts have succeeded in many countries and regions.

While the U.S. has legalized cannabis at the state level, the federal level has not followed suit, although there have been encouraging attempts at doing so in recent years.

RACY has some interesting prospects, but the lack of a previous successful track record for management using a SPAC vehicle is a concern.

I’m therefore on Hold for RACY in the near term.

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