Special-purpose acquisition companies (SPACs) have been around for many years, but they have become very popular in the last two years, raising more than $83 billion in 2020 and around $100 billion already in 2021. In fact, the amount SPACs raised in 2020 was more than the total raised in the prior decade. A SPAC raises capital in an initial public offering (IPO) with the intention of identifying and merging with a private company within 18 to 24 months after the IPO. Given the significant amount of capital SPACs have raised, the number of SPAC mergers with private companies will continue to grow over the coming months and years.
The rapid growth of SPACs as a mechanism for private companies to access the public capital markets is drawing enhanced scrutiny from regulators and investors, and the Securities and Exchange Commission (SEC) recently issued public statements identifying key issues for SPACs and private companies that may be targets of SPAC mergers to consider,1 including the following:
- public market, regulatory, disclosure, and timing considerations
- financial reporting and auditor considerations
- internal controls and books and records requirements
- corporate governance
A private company contemplating an IPO typically devotes many months or even years preparing to transition to a public company. For a private company merging with a SPAC, the transition process to a public company likely will be on an accelerated timeline that will impose significant pressure on the private company to put in place the personnel, systems, processes, and technology necessary to satisfy the regulatory filing, corporate governance, audit, tax, and investor relations obligations of a public company. A private company contemplating a merger with a SPAC will need to develop a comprehensive plan to address the requirements of becoming a public company on this accelerated timeline. The private company also will need to comply with public company disclosure requirements on an accelerated basis, including disclosures regarding the company and the SPAC merger that will need to be made in advance of closing the transaction. Failing to plan for and address these public market, regulatory, and disclosure requirements could delay and otherwise negatively impact the timing of the transaction.
One crucial regulatory and disclosure consideration will be having in place appropriate personnel and processes to comply with SEC requirements for financial reporting. The chief accountant for the SEC's Division of Corporation Finance recently advised that a private company target must have an audit that satisfies Public Company Accounting Oversight Board (PCAOB) standards to merge with a SPAC and that the SEC will not review the registration statement for a SPAC merger if it does not include the opinion of a PCAOB-registered auditor.2
This requirement for a PCAOB-compliant audit will introduce additional time and complexity to the audit process because historical audits of the private company target likely were performed under private company audit rules that are different from PCAOB audit standards, and the firm that performed the historical audits may not have satisfied the SEC's auditor independence requirements. Accordingly, private company targets will need to analyze audit-related requirements as soon as possible in the transaction process to determine whether they will need to retain a new auditor and perform additional audit procedures on prior financial statements.
Public companies must establish and maintain a system of internal accounting controls sufficient to comply with financial reporting obligations and provide reasonable assurances about management's control, authority, and responsibility over the company's assets. Additionally, public companies must maintain books, records, and accounts in reasonable detail to appropriately reflect the company's transactions and dispositions of assets. A private company target in a SPAC merger will need to prepare for these obligations in advance of the transaction closing and may need to invest significant resources to comply with them.
Most SPACs will be listed on a national securities exchange, such as the New York Stock Exchange or the NASDAQ Stock Market, and the combined company after a SPAC merger will be subject to the applicable exchange listing standards, including corporate governance requirements. These requirements will include a majority-independent board of directors, an independent audit committee consisting of directors with specialized experience with audit and financial reporting matters, independent director oversight of executive compensation and director nominations, and codes of conduct and policies applicable to directors, officers, and employees. Accordingly, the private company target will need to consider changes it may need to implement to comply with these corporate governance requirements, such as identifying potential new directors. Complying with these requirements will require advance planning and may impose additional costs and burdens on the target.
Given the unique issues involved in a SPAC merger, a private company considering this transaction as a means for accessing public markets will need to carefully evaluate the actions necessary to become a public company upon closing of the merger and develop a comprehensive plan for implementing these actions. Implementing this plan will require significant time and resources, and failing to adequately prepare for the challenges of a SPAC merger in a timely manner could impose additional costs and burdens or prevent the parties from completing the transaction.
[1] Staff Statement on Select Issues Pertaining to Special Purposes Acquisition Companies, Securities and Exchange Commission Division of Corporation Finance (Mar. 31, 2021); Financial Reporting and Auditing Considerations of Companies Merging with SPACs, Paul Munter, Acting Chief Accountant, Securities and Exchange Commission Office of the Chief Account (Mar. 31, 2021).
[2] Remarks of Lindsay McCord, Acting Chief Accountant, Securities and Exchange Commission Division of Corporation Finance, 19th Annual Financial Reporting Conference Hosted by Baruch College, May 5, 2021.