In the first two quarters of 2020, special purpose acquisition companies (SPACs) raised more than $30 billion, according to SPAC Research, a major increase versus the $13 billion raised in the entirety of 2019. SPAC mergers are becoming a popular alternative to a traditional initial public offering (IPO) because they speed up timelines to go public, provide companies with access to capital even during times of market volatility and allow for quick, closed-door deal negotiations.
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.
Why SPAC mergers are rapidly becoming more popular
The growth of SPAC IPOs is undeniable:
- 2013 had 10 IPOs with an average size of $144.7 million.
- 2017 had 34 IPOs with an average size of $295.5 million.
- 2019 had 59 IPOs with an average size of $230.5 million.
- Q1 and Q2 of 2020 had 95 IPOs with an average size of $397.7 million.
According to The New York Times, soaring valuations of SPAC targets have become a major driver of this trend. Much of the activity comes from the technology sector. For example, in 2019, Virgin Galactic went public by merging with a SPAC.
The Nikola Corporation, which merged with a SPAC in early 2020, chose this route as a speedier way to get to market. According to Barron’s, Nikola CFO Kim Brady said, “We thought that by going with a SPAC we might leave some value on the table, but we also knew that it would take much longer to [do a traditional IPO.]”
In some ways, the growing popularity of SPAC mergers creates a feedback loop by which these types of deals become even more favorable for target companies. Essentially, as more investors are drawn to SPACs, the terms they offer become more competitive. Typically, SPACs give warrants to investors that grant them the right to buy stakes in the target company at a reduced price. However, in some deals, these warrants have been virtually eliminated, giving the target company much more favorable terms, and therefore greater incentive to go the SPAC route versus a traditional IPO.
Investors retain a number of advantages, including:
- Net asset value transparency: Investors have redemption rights, which allow them to get their money back if they dislike the opportunity presented by the target company.
- SPAC manager preference: Because SPACs initially have no operations, investors put their money, and their trust, in the people who manage the SPAC. This allows investors to side with a leadership team they have faith in.
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 (firstname.lastname@example.org, 603-686-2020).