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Perspectives

A primer on SPACs

Risks and trends amid a shifting IPO landscape

Special purpose acquisition company (SPAC) transactions may be considered as a capital-raising alternative to initial public offerings (IPO) or other financing activities. SPAC transactions result in the private operating company (Target) involved becoming a public company. As a result, SPAC transactions require the Target to devote substantial time and resources to technical accounting and reporting matters, which are discussed below.

Private company CFO considerations for SPAC transactions

Although SPACs have been used for decades as alternative investment vehicles, they have recently come into vogue as seasoned investors and management teams have turned to SPACs to mitigate the increased market volatility risk of traditional IPOs. 2020 has been a record-breaking year for SPAC IPOs. This surge has been driven by the influx of high-profile investors and management teams entering the SPAC space, coupled with an abundance of uninvested capital that had largely been sitting out the first half of 2020.

SPAC risks

SPAC transactions come with their own set of unique challenges, and it is essential for entities to have (1) an understanding of the risks associated with these investment vehicles and (2) a comprehensive project management plan to meet the demands of an accelerated merger timeline.

Recent market volatility, combined with the arrival of seasoned sponsors and management teams, has created a modern-day SPAC revolution. The abundance of funds held in trusts and the increased appetite for private investment in public equity (PIPE) transactions have thrust SPACs beyond the fringe of capital markets and into the mainstream as significant players for potential sponsors, investors, and target operating companies.

In this publication, we’ll explore:

  • Background: A brief look into the past and present of SPACs, including this year’s record-breaking pace.
  • The rise in SPAC use: An examination of the conditions and trends driving the momentum of SPACs in 2020.
  • Life cycle of a SPAC: An overview of the life cycle of a SPAC, from inception through the consummation of a merger.
  • The demands of ongoing operations: A survey of the core competencies that must be examined and elevated after a target company is acquired.

Accounting and SEC Reporting Considerations for SPAC Transactions

The financial statement requirements and related SEC review process for a SPAC transaction are largely consistent with the requirements for a traditional IPO. SEC Chairman Jay Clayton recently discussed the increase in SPAC transactions in a television interview. He noted that SEC staff believe that investors who are voting on a transaction should receive the same rigorous disclosures that they would receive in a traditional IPO. Chairman Clayton further indicated that SEC staff are focused on disclosures of the compensation and incentives that go to a SPAC’s sponsors. When planning for SPAC transactions, entities should also be mindful of the following unique considerations:

  • The SEC’s draft registration review process is generally not available for SPAC transactions.
  • The SPAC and the target must work through the accounting for the transaction to determine (1) whether the SPAC or the target is the acquirer for accounting purposes (the “accounting acquirer”) and (2) whether the nature of the transaction is an acquisition or recapitalization.
  • Pro forma financial information must be presented to reflect the accounting for the transaction.
  • While the SEC review process for a SPAC is as thorough and rigorous as that of a traditional IPO, after the SEC has completed its review of a SPAC’s proxy or registration statement, there is generally a period (e.g., 20 days) during which SPAC shareholders decide whether to approve the transaction. Separately, investors must also decide whether they wish to participate in the combined company or redeem their shares in the SPAC.
  • In addition to SEC requirements, the target’s management may have other reporting considerations related to its support of the transaction, such as assisting in the marketing of PIPE financing and securing additional funding for the transaction.

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The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

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