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Perspectives

Digital asset companies and SPACs: What emerging companies should know

Appeals and challenges of SPACs for digital asset start-ups

As the market for crypto, blockchain, and digital assets has expanded, so has the popularity of going public via special purpose acquisition company (SPAC). The industry and method seem to be a fit. But although digital asset SPAC transactions have important potential benefits, they’re not without hurdles.

Digital asset companies and SPACs: The intersection of two major trends

During 2021, there was a notable increase in the activities of, and market interest in, special purpose acquisition company (SPAC) transactions with digital asset companies. SPAC mergers enable private operating companies—known as target companies—to go public in a way that permits the target to negotiate pricing upfront, thereby offsetting the risk of market volatility and allowing companies to include forward-looking projections in their Securities and Exchange Commission (SEC) filings.

The expanding digital asset market has resulted in considerably increased interest from investors, and in particular SPACs, that are seeking new avenues into this industry.

Despite its popularity, going public via a SPAC merger is, generally speaking, not easier than a traditional IPO. The target company must devote substantial time and resources to technical accounting, disclosure requirements, SEC regulations, and structuring considerations, as well as internal controls implications, all the while upgrading to be public-company ready. For digital asset companies, the matter is further complicated by a host of challenges that often arise from applying current accounting standards and tax regulations to these transactions.

Big upside: The benefits of a SPAC merger for a digital asset company

Digital asset startups have a unique ability to raise capital through other means and may be generally profitable or sufficiently capitalized out of the gate. But if a company is going to be competitive long-term, it will typically need to turn to public markets. This is not uncommon among disruptive technology companies where early capital is necessary for growing market share at an expedited pace. SPAC mergers may be an effective route to acquiring capital and going public.

Beyond capital costs and the need for the right talent, going public comes with a host of compliance issues, including:

  • Complexities of securities laws, as well as pertinent banking rules and regulations
  • Increasing regulation and compliance requests from government entities and organizations
  • Know your client (KYC) issues, including compliance with the Travel Rule
  • Anti-money laundering (AML) requirements

And, of course, there are the many complex issues of governance. After all, players in the digital asset ecosystem do not have complete control of their universe. They typically rely on platforms over which they do not have full or direct control. Hence the need for strong governance procedures and practices.

SPACs created by seasoned management and business leaders as well as financial services companies are well positioned to provide the capital and much of the broader guidance that young companies and their founders need in order to go public. As companies grow, many SPACs can provide access to private investment in public equity (PIPE) investors. These entrepreneurs can provide additional and vital capital that can help a company scale up, capture, grow, and maintain market share in a highly competitive arena.

Finally, and perhaps most importantly, by their nature and inclination, SPACs may be open to taking greater informed risks in order to realize a higher upside, especially with early stage and emerging companies. What are other major considerations?

Big questions: The challenges of a digital asset company going public via SPAC

For young and emerging digital asset companies seeking to go public, there are a number of basic accounting, tax, and control questions and considerations.

Time to consider a SPAC?

Being the target of a SPAC merger can hold immense promise for younger and emerging companies in the digital asset ecosystem. The volume and value of the activity is tremendous. But navigating the complexity of a SPAC merger along with the complexity and innovation that animate this digital asset ecosystem defies easy categorization or solutions.

Deloitte has a team of professionals with experience advising companies throughout the life cycle of the SPAC process . We can advise and assist with the following:

  • Technical accounting assistance for digital asset companies.
  • Seller assistance, vendor due diligence, or both.
  • Implementation of public company GAAP.
  • Preparation of quarterly financial statements.
  • Preparation of pro forma financial statements.
  • Responding to SEC comment letters.
  • Drafting the MD&A and providing advice on non-GAAP measures.
  • Evaluating the significance of business acquisitions and the resulting reporting requirements.
  • Drafting SEC waiver requests (as applicable).
  • Assessment and build-up of an internal control environment for public companies.
  • Assistance with SOX implementation and certification, including blockchain- and digital asset-specific considerations.
  • Designing automated solutions for financial reporting processes and controls.
  • Tax planning/UP-C strategy and compliance, including considerations for digital asset companies.
  • Information technology system assessment and implementation.
  • Preparation for, and management of, additional audit procedures to conform to PCAOB standards.
  • Corporate governance structuring and reporting.
  • End-to-end project management.

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