Co-authored by Kat Peterson
At a glance:
- A Special-purpose acquisition company, or SPAC, is a way for companies to go public that’s often more efficient than a traditional initial public offering.
- Companies can go public within a few weeks or months with a SPAC versus months or years with a traditional IPO.
- The SEC review process for a SPAC is just as rigorous as that of a traditional IPO, so readiness is essential.
Several market analysts have declared that 2021 will be the “Year of the SPAC” and for good reason. A SPAC, or special purpose acquisition company, enables private companies to go public in a way that’s often quicker and more efficient than an initial public offering (IPO).
SPAC vs. IPO
A traditional IPO can take anywhere from six months to several years and involves working with investment banks, underwriters and risk assessors, as well as marketing the company to potential investors and drafting financial statements.
A SPAC, on the other hand, is a shell company formed by a group of sponsors — typically well-known investors, private equity firms, and venture capitalists — for the sole purpose of eventually acquiring an unspecified target company. The SPAC, also known as a “blank check company,” pools money and goes through the traditional IPO process without publicly identifying to the U.S. Securities and Exchange Commission (SEC) the company or companies it’s eyeing for acquisition.
After the IPO, the SPAC generally has two years to find a private company to merge with or acquire. Once a company agrees to be purchased by a SPAC, it becomes a part of the publicly traded SPAC, reducing the red tape and expense involved in a traditional IPO. If the SPAC doesn’t merge with or acquire a company within two years, it’s liquidated, and the money is returned to shareholders.
Why are SPACs so popular?
According to Reuters, in the first quarter of 2021, SPAC merger and acquisition volume was $172.3 billion in the U.S., up 3,000% from the prior year. Yet SPACs are not a new strategy; they’ve been around for decades. So why has this once-obscure M&A strategy become so wildly popular?
There are several reasons:
- Speed of execution. Companies can go public in a few weeks or months with a SPAC. A traditional IPO takes at least four months in the best-case scenario and could take a year or more.
- Lower fees. Because a SPAC takes less time and requires less extensive financial documentation, they’re less costly than a traditional IPO.
- No IPO roadshow. In a traditional IPO, executives go on a roadshow, making presentations to potential investors before going public. In a SPAC, the company doesn’t have to market itself to attract investor interest.
- Capital raising alternative. SPACs provide capital for growth or investment without debt service costs.
- Smoother transition. Because the SPAC hasn’t conducted any material business, the target company’s shareholders won’t face unexpected liabilities after the deal closes. There’s also no need for the SPAC to take control of the target company or displace existing management.
SPAC risks to consider
Being acquired by or merging with a SPAC can be a great opportunity for companies interested in going public without the hassle and time commitment of a traditional IPO, but the acquiring company’s management should take several risks into account.
The SEC review process for a SPAC is just as rigorous as that of a traditional IPO, and the company must file many of the same documents with the SEC, including:
- An S-4 to provide the details of the merger or acquisition, governance matters and historical financial information of the target company, as well as pro forma financial statements showing the effect of the merger
- An 8-K, which is due within 4 business days of acquisition
- An S-1 to register securities
If the necessary paperwork isn’t completed and submitted correctly, the company may encounter regulatory issues that stall the deal and distract management and executives from running the company.
Accounting and finance issues
Existing companies have established accounting and finance departments. As shell companies with no real operations, SPACs don’t have this in-house expertise and may rely on third parties to fill these roles. Internal accounting and finance teams without the expertise to handle the SEC reporting, financial due diligence, and other paperwork required by being acquired by a SPAC can expose the company to unforeseen risks.
In addition, once a company is acquired and folded into the SPAC, the SEC generally does not grant the same grace periods for many areas of regulatory compliance that it would extend to public companies created through a traditional IPO.
For these reasons, it’s essential for any company considering merging with or being acquired by a SPAC to have a comprehensive plan for navigating these risks and meeting the demands of an accelerated IPO timeline.
How Holtzman Can Help
SPACs can be an excellent way to raise capital, but readiness is essential. Whether you are embarking down the IPO or SPAC path, Holtzman can help. We can provide value throughout the IPO or SPAC process by performing a readiness assessment, preparing required SEC filings, and quality of earnings reports, technical accounting, purchase accounting, SOX compliance and readiness, and Public Company Accounting Oversight Board (PCAOB) compliance.
With clients ranging from startups and middle-market leaders to large multinational conglomerates, we dedicate ourselves to delivering stellar results for our clients. Learn more about our Transaction Advisory Services.