A primer on SPACs has been saved
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). 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, as well as other De-SPAC considerations.
Read our POV series on SPAC
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 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.
How to plan for the first days as a public company after a SPAC merger
Any company fresh from a SPAC merger faces a new set of challenges. Life as a newly public company requires processes, policies, and people to manage governance, IT, financial reporting, and tax, to name a few. Many of these actions have to be taken before the first day of trading, or in the days and weeks immediately after the De-SPAC transaction.
Since no two post-SPAC companies will be the same, the plan and workload will need to be tailored for each company, with likely many of the work streams running on parallel tracks. After a De-SPAC transaction, a company must address a number of matters that can be broadly categorized into six work streams. The matters are:
Finance and accounting: Closing financial reporting and quarterly earnings and other financial disclosures on time.
Corporate governance: Corporate board oversight is essential prior to listing; a portion of the board must be independent and nonmanagement, and board members need to understand their responsibilities and fiduciary duties from day one. Overall governance measures need to be in place throughout the organization.
Internal processes and controls: Even prior to reporting the first quarter of earnings as a publicly traded company, significant controls and processes need to be in place to meet regulatory requirements. These center around rules, often in the Sarbanes-Oxley (SOX) Act of 2002, to create internal controls and related policies that are aimed at safeguarding of assets, reliable financial reporting, and reducing the risk of fraud.
Information technology (IT): With information being a crucial asset in the modern corporation, IT as the custodian and protector of this information has a front-row seat for major executive-level issues and discussions. But many organizations in the post-SPAC phase have comparatively bare IT organizations and capabilities in place.
Cyber: Related to IT, an organization’s cyber capabilities will be tested every day. But because so much of an organization’s operations and value is tied with its ability to protect data and maintain operations after a cyber threat is discovered, this capability can’t be delayed.
Tax: Tax is often central to financial reporting and transaction planning. The post-SPAC company can emerge in a much more complex tax situation than prior to the SPAC transaction. Many of these complexities relate to the resulting tax structure, which is designed to accommodate both the legacy owners of the company and the shareholders of the SPAC.
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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.