A Special-purpose acquisition company (SPAC) is a pooled investment vehicle that allows public stock market investors to invest in private equity-type transactions, particularly leveraged buyouts. SPAC is a shell or blank-check company that doesn’t have any operations but go public to merge with or acquire a company with the proceeds of the SPAC’s initial public offering. In simple terms, A SPAC raises capital through an initial public offering (IPO) to acquire an existing operating company. Subsequently, an operating company gets merge with (or be acquired by) the publicly traded SPAC and become a listed company instead of executing its IPO.
This approach offers several advantages over a traditional IPO:
- It provides companies an access to capital, even when market volatility and other condition limit liquidity.
- SPACs would also potentially lower the transaction fees as well as expedite the timeline to become a public company.
However, the merger /acquisition of a target company with SPAC face several challenges as well such as
- Target company’s management team would need to focus on being ready to operate as a public company within few months of signing a letter of intent.
- Have to comply with complex accounting and financial reporting/registration requirements that may differ based upon the lifecycle of the SPAC involved.
- SPACs are more transparent than a private equity since they are registered offerings regulated by SEC, including filing of financial statements and full disclosure of any material events affecting the company.
- SPAC vehicle for the target company is an opportunity to effect a reverse merger that can yield more capital.
- Shareholders have a special rights to vote in approval or rejection of the deal.
- It provides liquidity to an investor as SPACs are publicly traded.
Typical SPAC timeline
Accounting and reporting considerations
The target company needs to consider numerous accounting and reporting requirements including:
- Public company readiness: A target company in a SPAC merger needs to prepare itself for being a public company usually within a few months, which is quite a shorter timeline compared to a traditional IPO for substantially the same level of preparations, due diligence, prospectus-drafting and SEC engagement and oversight.
- Tax Structuring: A SPAC merger requires multiple steps of legal / equity restructuring that might impact tax status and other considerations of the target company.
- SEC reporting accommodations: The target company may qualify for a reporting accommodations provided to an emerging growth company or small reporting company in certain circumstances. Such relief might meaningfully impact the time and efforts required to consummate the intended transactions. Target company should discuss these accommodations with its SEC advisors well in advance in the readiness preparations.
- Financial Statements: The target company’s financial statements must be prepared in compliance with SEC reporting requirements.
- PCAOB audits: Annual and interim financial statements of the target company must be audited and reviewed based on PCAOB standards, which will add additional time and complexity to historical audits as compared to AICPA standards.
- MD&A: The target company must include a Management Discussion & Anlaysis (MD&A) disclosure for all periods presented in its financial statements so that investors can understand its financial condition and results of operations. MD&A disclosures usually require extensive data analysis and consists sensitive financial and operating information.
- ‘Super’ 8-K: The target company must file a Form 8-K with equivalent information that would be required in a Form 10 filing (commonly referred to as the ‘Super’ 8-K) with the SEC within four business days of closing.
SPACs continue to gain popularity as a potential liquidity option for many existing companies. The SPAC merger process with a target company may be completed in as little as 3 – 4 months, which is substantially shorter than a typical traditional IPO timeline.
MAS is a PCAOB registered firm and can cater to all your professional service requirements related to SPAC transactions.