The special purpose acquisition company (SPAC) is a corporation formed for the sole purpose of raising investment capital through an IPO. Such a business structure permits investors to provide money towards a fund, which is then used to acquire one or more unspecified businesses recognized after the IPO. SPAC has undergone several structural evolutions to provide SPAC operators with the best possible opportunity to achieve a successful business combination. These efforts have been tremendously successful and can be credited with the massive resurgence, utilization and success we witness today.
The areas of management and transactional liability involved in working with the SPAC are highly specialized. Additionally, as the insurance community is still largely yet to discharge many of the negative stigmas associated with the SPAC vehicle from years past, understanding and negotiating the terms and conditions required of a SPAC insurance program takes a significant amount of knowledge an insurance broker. As a result, it is clear that the SPAC is still largely misunderstood by the insurance marketplace and is therefore not being fully represented during negotiations with underwriters. These conditions have commonly resulted in very limited insurance market appetites, significant gaps in coverage, and high costs of risk, leaving key parties with dangerous and often unnecessary exposure levels.
SPAC has the ability to the selling target executives to remain as the ongoing management team post-combination. It allows the SPAC to look to the insurer for indemnification of a breach rather than making an indemnity claim against their new management team, greatly benefiting the partnership and reducing its stress.
Benefits of SPAC
Companies and investors use SPACs as an alternative route to a traditional IPO. SPAC sponsors, investors, and target business owners all enjoy specific benefits from SPACs.
While raising capital, SPACs provide access to a much broader base of potential investors, especially in comparison to private placements.
SPACs provide the chance to co-invest with successful sponsor firms and individuals. They provide specific liquidity provisions and protection measures against potential downsides until closing on target business combinations.
- Target businesses
SPACs give privately held companies more accessible access to public markets, particularly during market instability. Access to capital can fund their operations and growth procedures while still permitting existing owners to share in that growth through the stock.
SPAC transaction timelines
SPACs transaction timelines have split into three main phases:
- Initial IPO
- Incorporate the SPAC and sell the founder shares
- Arranging and filing the S-1 with the securities and exchange commission
- Obtain underwriting agreements
- IPO roadshow, pricing and closing
- Search for a target business
- SPACs exists in the first phase as SPAC files any regularly required SEC filings during this search phase.
- Identification of the target business
- Perform due diligence on those businesses
- Prepare the proxy filing
- Sign the SPAC acquisition and other financing agreements
- Approval and closing of the transaction
- Finalize and announce the acquisition agreements
- File the preliminary proxy with the SEC
- Obtain SPAC shareholder consent of the transaction through a majority shareholder vote
- Justify common shares for investors opting out and close the transaction
- File super 8-K with the SEC.
Accounting & Reporting Considerations
Since the target businesses are almost always private companies, their historical financial statements generally comply with US GAAP requirements for non-public entities. But post-SPAC IPO, those historical financials must now comply with Regulation S-X and the US GAAP requirements for a public company. It must include the historical financial statements audited by an independent auditor under PCAOB auditing standards as per SEC rules.
SPACs continue to gain popularity as a prospective liquidity option for many existing companies. The SPAC is getting more significant, the aggregate amount of capital hunting has increased, and more and more well-known companies have endorsed the SPAC structure. SPACs appear to now be a convenient alternative to an IPO.
MAS is registered with PCAOB, USA and assists its clients with SEC filings including S-1, F-1 Regulation- A, Regulation-CF, 10Qs and 10 Ks, preparation of US GAAP financial statements, drafting the SEC filings ensuring they comply with all statutory requirements in a timely manner. If you have any questions or wish to know more about SPACs, kindly contact us.