SPACs became ever more popular through 2020 and 2021, with SPAC IPOs raising more than $245 billion over the past two years. That has brought on a variety of accounting challenges and, most recently, a new proposed rule from the SEC enhancing SPAC disclosures. With hundreds of public SPACs looking for target companies to complete their merger, 2022 is sure to be a year filled with deSPAC mergers. The accounting functions of target companies often need to ramp up quickly to prepare for the merger process, SEC filings and life as a public company once the merger closes, and having an accounting advisor with experience in the process is increasingly valuable.
What is a SPAC?
SPACs have no commercial operations. They are formed with the intention to raise capital through an IPO and then acquire or merge with an existing company. SPACs may also be referred to as blank check companies because their acquisition targets are typically unidentified at the time of the IPO. SPACs generally work with investment banks prior to offering shares to retail investors.
What the accelerated timeline of SPAC mergers means for accounting and reporting requirements
Following the IPO, a SPAC usually has between 18-24 months to identify an acquisition target, approve the merger and complete the transaction. SPAC mergers that fail to achieve velocity will increase the risk that the deal falls apart. When that happens, the SPAC must either renew its search for a target or dissolve and return the capital it raised to its investors. Generally, a SPAC has a limited life as its Articles of Incorporation likely contain a sunset provision that requires dissolution of the SPAC if it doesn’t consummate an acquisition within a specified period of time.
When a target company is identified, the de-SPACing process will begin. This includes, but may not be limited to:
- Obtaining shareholder approval (including Founder shareholder votes).
- A redemption offer to holders of public shares of the SPAC.
- Sourcing additional financing in order to effect the purchase (e.g., a PIPE investment), if necessary.
- Filing a proxy statement with the SEC to include requisite financial and legal information required by SEC rules and regulations (e.g., Registration Statement on Form S-4 or Schedule 14A).
Additionally, there are many other challenges for the SPAC and the target company to address, including:
- Equity restructuring: The target company will likely need to restructure in a manner that impacts its tax status.
- SEC requirements: The SPAC and its target company will need to fulfill reporting requirements, including historical financial statements as well as pro forma financial information.
- Public company readiness: Compared with a traditional IPO, the target company will have a shorter than usual period in which to prepare to be a public company. This will result in preparing quarterly financial statements, conducting internal audits, implementing new risk management policies and other considerations.
All of these accounting and reporting requirements must be fulfilled not only quickly but also accurately. SEC comments will only slow down the process and introduce more risk of delay.
Once the de-SPACing is completed, the newly combined company will be required to file a current report on Form 8-k (“Super 8-K”), that includes all of the information required by a Form 10 registration statement.
How CFGI supports successful SPAC mergers
SPAC mergers move fast, and target companies often need additional manpower and expertise to complete audits and prepare financial information required to be filed with the SEC in a timely manner. The experts on CFGI’s capital markets advisory team have extensive experience with SPAC mergers, reverse mergers and IPOs.
If you’re interested in learning more, please contact April Coleman, Partner (acoleman@cfgi.com, 603-686-2020).