Active capital markets and an unprecedented 2020 resulted in an increase in popularity of Special Purpose Acquisition Companies (SPACs) as an alternative way to raise capital compared to a traditional IPO. There are reasons why SPACs have become a preferred investment vehicle for many investors and companies: they give privately held companies faster access to public markets, particularly during market instability; and for raising capital, they provide access to a broader base of potential investors and the opportunity to co-invest with successful sponsor firms and individuals.
While the SPAC approach of going public brings new opportunities for both investors and companies, of equal importance is an understanding of the key considerations across the formation, target search, and closing phases of a SPAC transaction lifecycle; each comes with its own unique challenges, including an acceleration of SEC filing requirements and ensuring public company readiness.
Key Considerations Across a Typical SPAC Transaction Lifecycle
Phase 1: Formation
Pre-deal activities commence with the SPAC formation and initiation through a S-1 filing, deal negotiation, and financing and tax structuring considerations. During the formation, the sponsors (i.e., founding investors) select the legal counsel, underwriters, and auditors, after which the SPAC seeks to raise capital by preparing and filing its public offering through the S-1 filing with the intent for a merger in a particular industry.
Phase 2: Target Search
Pre-close activities focus on the target search, raising capital, preparation of the proxy statement and the merger vote. The SPAC identifies acquisition opportunities and negotiates a merger with the target (i.e., a de-SPAC transaction). At this point, the SPAC must have sufficient capital to complete the merger, which can be achieved during IPO and additional funding generally raised through the PIPE (Private Investment in Public Equity).
The financial reporting requirements for a target in a SPAC merger are extensive and must be completed in an accelerated timeline leading up to the proxy statement or Form S-4 filing. Because the target in most cases becomes the SEC reporting entity, they must satisfy a wide range of SEC requirements, which include preparation of the following:
- Public Company Accounting Oversight Board (PCAOB) audit opinion (versus American Institute of Certified Public Accountants [AICPA] for private companies);
- Audited annual S-X compliant financial statements;
- Unaudited interim financial statements in accordance with SEC guidelines; and
- Proxy statement.
Once shareholders approve the SPAC merger and all regulatory matters have been cleared, the merger will close and the target company becomes a public entity.
To meet these requirements, a thorough understanding of complex accounting and SEC reporting rules and regulations is required. Additionally, the target devotes substantial time and resources to technical accounting and financial reporting matters in order to prepare for the transaction.
Phase 3: Closing
The SPAC closing activities focus on ensuring public company infrastructure is in place to establish a sustainable ongoing public company reporting process. Public company readiness for a target company includes the following assessment and implementation:
- Define and implement accounting policies;
- Integrate investor relations;
- Form and/ or enhance financial planning and analysis (FP&A), and accounting and financial reporting functions;
- Establish an internal control structure to comply with the requirements of the Sarbanes-Oxley Act (SOX);
- Consider an appropriate Enterprise Resource Planning (ERP) solution to ensure current systems can support the quality and timeliness of the internal and external reporting needs; and
- Ensure appropriate corporate board oversight and governance and a clear understanding of roles and responsibilities across Enterprise Risk Management (ERM).