The company plans to complete the merger -- or "de-SPAC" -- in the first quarter of 2021, and the deal will also encompass Triller’s acquisition of several well-known companies, according to the source, making for a complex mergers and acquisitions (M&A) transaction.
Last month Proxima Media hired Tuhin Roy, who has shepherded companies like Pandora and Digital Music Group through IPOs, as an operating principal and Triller’s president of business operations, fueling rumors of Triller’s potential IPO. In an interview with Billboard, Roy said his “immediate goal” is to make Triller's operational standards "consistent with a publicly-traded company."
While SPACs have existed for decades, this IPO alternative has become increasingly popular amid the market volatility brought on by the coronavirus pandemic because it allows companies to go public quickly (and enjoy the potential cash influx of doing so) while avoiding, at least in part, the regulatory scrutiny, investor roadshow and valuation uncertainty that comes with a traditional IPO. SPACs raised nearly $54 billion through IPOs in 2020 -- more than the total raised in the prior seven years, according to industry tracker SPAC Research -- and recent examples of companies acquired by SPACs include sports betting operator DraftKings, electric truck startup Nikola Corp. and space travel company Virgin Galactic Holdings.
Triller wouldn’t be the first music company to go public via SPAC -- independent distributor The Orchard effectively did so when it merged with publicly-traded Digital Music Group in 2007 -- but it would mark the biggest such example in recent memory. SPACs have numerous benefits for a company like Triller, which might be a risky sell to the public market due to its nascent business model and obstacles like pending litigation. But this reverse-IPO method comes with its own challenges, too.
When a SPAC is formed, its founding investors (or “sponsors”) are promised an equity stake of typically 20% in the SPAC after its IPO, while the remaining 80% interest is held by public shareholders through units offered in an IPO of the SPAC’s shares. The SPAC then has a specified period (usually 18 to 24 months) within which to merge with or acquire a target.
When that specified period ends, if a merger has not been completed, the SPAC liquidates and all the money goes back to the shareholders. Shareholders can alternatively vote against the transaction and redeem their shares. (To ensure that the target still retains as close to its original valuation as possible, SPACs and targets often negotiate a “minimum cash” closing condition.) “From an investor’s point of view, it’s a completely risk-free place to park money, collect management fees and interest, and get a free bite of the apple,” says Lise Buyer, founder and managing partner of IPO consultancy firm Class V Group.
For target companies, SPAC mergers are an easier path to the public market because they only have to convince the SPAC’s majority shareholders to get on board -- not the broad public, without the need to make the kind of open-book financial disclosures and risk assessments required in a traditional IPO. SPACs also offer the target company more certainty in the amount of money that will be raised and the valuation it will receive, since those factors are largely set months before the transaction closes. By contrast, in a traditional IPO, “you don’t know how the market is going to value you until the night of the deal,” Buyer explains.
For these reasons, SPACs have historically attracted cannabis vendors, online betting websites and other companies which “weren’t sure they could get enough interest in public markets,” she adds. “They all used SPACs to get cash in the bank, used that cash to build out the business and then gradually won over the investing public.”
Triller’s Case: Opportunities and Liabilities
While Triller isn’t as controversial as cannabis, it does operate on a nascent business model with plenty of room for liabilities, making a SPAC merger a better option than a traditional IPO.
Founded in 2015 but recently retooled under Proxima’s majority-ownership, Triller makes most of its revenue through CrossHype, its influencer marketing product for brands; merchandising opportunities; and a pay-per-view livestream events business, thanks to the company’s acquisition of livestream platform Halogen in July. In the future, it will also monetize through ads on the platform.
The company is reportedly shelling out cash to lure top influencers over to its platform, gifting social media stars like Charli D’Amelio and Bryce Hall everything from luxury cars to mansion rentals. But it has other serious expenses: Triller pays record labels and publishers to license music for users to play in their clips. While the company has music licensing arrangements in place with Universal Music Group, Sony Music Entertainment and Warner Music Group, not all its deals are locked down. It is facing a $50 million copyright lawsuit from Wixen Publishing alleging copyright infringement on more than 1,000 songs, as well as ongoing criticism from the NMPA.
Triller could argue it is protected from liability for users’ copyright violations through the Digital Millennium Copyright Act’s (DMCA) Section 512 “safe harbor” provision, under which platforms process takedown requests filed by rights holders for any alleged copyright infringement. But it's complicated with services like this, which essentially act as a tool for users to synch video to a library of music, and because of that might have a hard time claiming protection under the DMCA. And music licensing for video platforms is a particularly thorny process, since combining a recording with video usually requires licenses to use and synch both the recording and composition. Since Triller relies on access to a catalog of popular music, the seemingly inevitable path of least resistance (and least takedown notices and lawsuits) will be making deals. (Earlier this year, amid mounting pressure TikTok also settled licensing deals and Triller already has some publishing deals in place.)
“If [Triller] were going to try to go to the public markets, they’d have to disclose all of the pending litigation and present all sorts of information about what other litigation might come,” says Berklee College of Music associate professor George Howard. “I’m not saying they have anything to hide, but given the fact that there’s already litigation with Wixen, that could be one of the reasons for choosing to [merge with a SPAC].”
Howard also points out that going public could make Triller even more vulnerable to lawsuits. “There’s money [in Triller] -- that’s why Wixen is going after them,” he says. “There would be more money if there was some type of raise through a SPAC, and undoubtedly, some of that money is going to go towards ongoing litigation.”
In any plan to go public, Triller will also have to grapple with accusations that it has inflated its user numbers. In October, six former employees disputed Triller’s announcement that it had 100 million monthly active users; Triller has also claimed 250 million global downloads. While Triller has fiercely denied the accusations, the mere presence of doubt over its numbers could give investors pause, since “at a certain point, daily active users are the key performance indicators for any of these types of businesses,” Howard says. Any company which sells public securities based on information that is proven to be untrue is guilty of securities fraud.
In any event, Triller can only avoid the user question for so long: Once the company has public filing status, it will report its user numbers in quarterly filings with the U.S. Securities and Exchange Commission (SEC), including monthly active users.
Buyer adds that “public company investors always spend a lot of time thinking about who the competitors are, and what are the odds of succeeding against them.” Triller still has a long way to go before it can catch up with TikTok, which has 100 million monthly active U.S. users and 2 billion global downloads -- and although TikTok faced a potential U.S. ban from the White House over the summer, that threat has fizzled out along with Donald Trump’s presidency.
Even so, Howard says that the presence of competition shouldn’t deter smart investors: “Typically, when you see these spaces emerge, it’s healthy for the market for there to be alternatives.” Even if Triller is a fraction of the size of TikTok, that could be a positive thing from an investment perspective, because it means the company has plenty of room for growth.
After the SPAC Merger “The Real Work Begins”
The accelerated timeline of a SPAC merger means that a target company can claim public filing status in as little as three to four months, whereas a traditional IPO can take six to 12, including the grueling due diligence process of collecting financial paperwork. However, Buyer warns against the assumption that SPACs require any less work than traditional IPOs: “All the same work has to be done, it’s just that it’s done after the company is public,” she says. “They agree to do the merger, and then the real work begins.”
A Super 8-K form must be filed with the SEC within four days of the merger, containing substantially the same information that would be required in a registration statement for companies that go through a traditional IPO. Once the merger is complete, the target company is expected to meet public company SEC reporting obligations. There is one crucial difference: Going through a SPAC means that Triller will only be required to report actual numbers, not future estimates, meaning there’s no pressure for the company to set and meet benchmarks.
Triller’s rush to de-SPAC may pay off for other reasons still, since Buyer notes that the 2020 SPAC boom is likely reaching its peak. As the “frenzy” of SPACs launched this year scramble to buy companies within their specified periods, she says, we can expect that over the next 18 months, “the quality of the companies being acquired is on the way down.”
“It’s one thing to raise the money for a SPAC,” she says, “ but it’s another to invest it wisely.”