Article

Considering a Special Purpose Acquisition Company (SPAC) Transaction?

February 18, 2021

What a start to 2021 for Special Purpose Acquisition Companies (“SPACs”). By the end of January 2021, the investor community had created 300 SPACs with $500 billion dollars. With SPACs required to invest these funds in two years, business of all sizes have seen a flurry of interest.

What’s so attractive about investing in a SPAC?  SPAC sponsors can guarantee investors a precise amount of money.  That’s correct – a precise return, unlike traditional Initial Public Offerings (“IPOs”).

A SPAC does not come without risk. Public investors have no such return guarantees and some would argue bear more risk than a typical IPO. A SPAC is a merger instead of a listing allowing the company merging with a SPAC to show projected financial results. However, many institutional investors, and companies alike, find the typical process of filing an IPO time-consuming, onerous and costly. These investors believe regulations may evolve, but SPACs are here to stay.

Cherry Bekaert has a specialized team of advisory advisors that have guided sponsors and merger candidates in all facets of these transactions. We find it helpful to walk many of our clients through the fundamentals of a SPAC. Here’s a summary of key discussion items:

  • Origin of a SPAC – The SPAC sponsor pays some nominal amount for founder’s stock in a SPAC. Most sponsors target this investment to represent 20% of stock in the SPAC after an IPO.  This ownership compensates the sponsor for all the activities related to an IPO, identifying merger candidates and other administration.
  • SPAC’s public offering – Shortly after creation, SPACs move quickly to facilitate a public offering. After getting through Securities and Exchange Commission (“SEC”) comments, SPACs raise capital by issuing ownership units.  Funds are held in a trust until a target is acquired.  Warrants or other instruments have been issued and tied to the timing and success of a merger.
  • Finding an acquisition target – Sponsors search for an acquisition target using a typical M&A approach. However, sponsors cast a wider net of companies for acquisition. In fact, many pre-revenue companies have merged into a SPAC because of a story they can tell around their forecast, instead of relying on historical financials.
  • Proxy and shareholder vote – SPAC shareholders are generally required to approve the merger. This requires the entity to file a proxy with the SEC and respond to comments.

Our advisors have assisted many sponsors and merger companies throughout the process.  We find the merger proxy process moves quickly, typically two to four months. After the SEC comments are cleared and the transaction closes, companies file a Form 8-K, known as a “Super 8-K”. At this point, companies can begin to file the 10-Q and 10-K and start readiness around internal control requirements.

Are you considering merging with a SPAC and talking with a sponsor?  Your sponsor will describe your needs. Cherry Bekaert knows this process moves fast and we can meet most any technical accounting and financial reporting needs you have, including:

  • GAAP requirements for a public company
  • Conversion from IFRS to U.S. GAAP accounting standards
  • Pro-forma financial statement preparation
  • Quarterly and annual financial statements
  • SEC comment responses
  • Drafts of MD&A and advice on non-GAAP financial measures
  • Tax services including UP-C strategy and compliance
  • Internal controls for quarterly SOX Section 302 certifications
  • Readiness for SOX Section 404 requirements

How We Can Help

This transaction approach offers many advantages over a traditional IPO, such as providing companies certainty with negotiating the terms of their public offering and speed with the merger process, among other things. Sponsors and companies benefit from easy access to capital and could also encounter lower transaction fees, as well as an expedited timing to become a public company.

In our experience it is never too early in the process to talk. Interested in a SPAC transaction? Reach out to discuss how Cherry Bekaert can help you evaluate your company’s future through IPO readiness and technical accounting guidance, please contact Chase Wright today.