Special purpose acquisition companies (SPACs) are an alternative to a traditional initial public offering (IPO) for privately held companies. Otherwise known as “blank check companies” or “public shells,” SPACs are certainly the hot topic of conversation right now as they are becoming a popular means to raise capital in the disrupted financial market. The following are some key considerations private companies CFOs should know about SPACs.
Background
SPACs are formed by an experienced management team (referred to as the SPAC’s sponsor) for the sole purpose of raising capital through an IPO and then investing in a privately-held operating company (the target company). The SPAC has no operations of its own. At formation, the sponsor may have a target company already in mind. If not, upon closing the IPO, the sponsor begins the search for a suitable target.
Time is of the essence after the IPO; the SPAC’s governing documents provide for a limited life of generally 18-24 months in which it needs to identify and close on an acquisition. Otherwise, the SPAC liquidates and returns the IPO proceeds to investors unless it obtains shareholder approval to extend its life. In the end, the SPAC public shareholders either vote to approve the acquisition or redeem their investment if they do not desire to invest in the identified target or at the agreed-upon terms.
Additional capital beyond what was raised in the IPO may be required to finance the target acquisition and/or to provide operating cash for the ongoing business. This is where private investment in public equity (PIPE) deals come into play. They may be pre-arranged by the SPAC sponsor by obtaining commitments from institutional investors. Other forms of capital may also be provided by issuing a combination of additional shares of common stock, shares of preferred stock or debt.
Impact of the SPAC Transaction on the Private Company Management Team
A SPAC transaction is possibly a quicker and less costly path for a private company to go public. However, this accelerated timeline presents challenges for a private company to complete an IPO readiness project before the SPAC lifecycle clock expires. Thus, project management is critical. The target’s management team will be faced with many competing demands on their time. In addition to running the day-to-day operations, management will be involved in activities such as pre-acquisition financial, legal and operating due diligence (and possibly reverse due diligence on the SPAC itself), potential deal structuring and tax planning, roadshows with current and potential investors, and ensuring that their organization is public-company ready.
Impact on the Accounting Function
The extent of immediate and ongoing reporting requirements should not be underestimated and may be a heavy lift for target company CFOs with under-staffed teams. While the SPAC management team and advisors will direct the process, most of the work will fall on the target company’s management team and advisors. A robust project plan detailing milestones, delivery dates, responsible parties and regularly updated status will assist in ensuring that the holistic project team stays on track. It is common to have multiple parallel financial workstreams addressing the various deliverables discussed below.
The target company’s financial reporting deliverables will include S-X compliant audited annual and unaudited interim financial statements, management’s discussion and analysis of financial condition and results of operations, pro forma financial statements, and pro forma and selected historical financial information. The audited financial statements require a PCAOB audit opinion by a registered accounting firm which could, in certain circumstances, require a re-audit. A key early determination is the number of years of audited financial statements to present.
Although the target company remains a private company at this point, its financial statements will be updated to reflect the adoption of new accounting standards using the public company effective dates. For example, a private company considering a SPAC transaction in 2020 would need to have already adopted ASC 606, Revenue Recognition, and ASC 842, Leases. Similarly, the impact of any private company accounting alternative elections, such as the amortization of goodwill, will be unwound in the financial statements. Other common public company GAAP considerations include the identification and disclosure of reportable segments and the reporting of earnings per share. Changes to historical financial statements such as these will be subject to audit. Finally, audited financial statements may also be required for historical significant acquisitions as determined by the S-X rules.
Additional complex accounting issues facing the private company include the need to identify the accounting acquirer in the transaction giving consideration to not only the deal structure but also both the variable interest entity and voting interest accounting models. This determination may require significant judgment and directly impacts whether the application of purchase accounting will be required. Agreement with the accounting conclusion should be obtained from the target company’s external auditors early in the process. Similarly, the determination of which party to the transaction is considered the predecessor is important given it is the predecessor’s historical financial statements that become the historical financial statements of the combined entity. Complications arise in scenarios involving multiple targets or a target that is considered a carve-out of another legal entity or a newly formed target that has recently acquired multiple entities in a roll-up transaction.
It’s Go Time!
A proxy statement or joint registration statement is filed with the SEC to solicit shareholder approval and, if needed, to register new securities issued. This SEC filing will include extensive information for both the SPAC and the private company target, some of which may have never been compiled by the target company previously. In addition to the financial reporting deliverables discussed previously, management should be prepared to provide a description of the business, risk factors, qualitative and quantitative disclosures about market risk, a description of properties, directors and executive officers, and compensation of directors and executives. All of the preceding should be drafted with much thought and with the assistance of experienced SEC legal counsel as it will form the initial investor relations messaging to shareholders and analysts. As with a standard IPO, the SPAC and private company target, along with their advisors, will respond to questions raised by the SEC staff as part of their review which is commonly referred to as the comment letter process.
Are We at the Finish Line Yet?
Once shareholder approval is obtained and the transaction closes, the private company target is officially a public registrant and the management team is responsible for meeting future SEC reporting deadlines and the associated activities. First up is a “Super 8-K” to be filed with the SEC within four days of the transaction closing containing the information that is required in a Form 10 registration statement which will be similar to the level of detail disclosed in the previously filed proxy statement or joint registration statement. Next comes the regular cadence of quarterly SEC reporting. Proper planning by management will go a long way to avoiding potential missteps. Concurrent with all of the prior activities, management should be building competent and experienced teams in the SEC financial reporting, investor relations, financial planning and analysis (FP&A), and financial controls functions. These professionals will need to quickly develop robust reporting processes and disclosure controls along with preparing to comply with the public company requirements related to internal control over financial reporting.
Final Thoughts
Our team is here to support the accounting teams of private companies in navigating a SPAC transaction, as well as aid in supporting the SEC filing requirements including the preparation of accounting memorandum and other documentation that may be required. For more information on becoming SPAC ready, please contact the author Melissa Henry at [email protected] or another member of our team for more information.
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