IPOs, SPACs, Due Diligence and Preparation

SPAC IPOs are all the rage – at least until now. During the first quarter of this year, for example, there were 298 IPOs involving SPACs. That compares to just 91 traditional IPOs during the same period, according to a report by accounting firm PWC (here). In contrast, during 2020 there were 487 traditional IPOs while only 341 involved SPACs. In the fourth quarter of last year, however, the number of IPOs involving SPACs began to rapidly climb, according to the numbers PWC compiled.

Now the number of IPOs has declined, particularly those involving SPACs, according to a report published by CNBC on April 22, 2021 on its website (here). The reason is unclear. It may be that the Commission is focusing on SPACs because of the use of projections in the offering materials or for other matters. SPACs are, of course, what at one time was called “blank check companies” – shells selling shares. Under that label there was no rush to purchase shares. But the new SPAC tag seems to have changed all of that.

As the number of SPAC IPOs climbed to a new high at the end of 1Q21, the Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, dated March 31, 2021 (here).

The Corp Fin release is divided into three segments focusing first on the limitations of the entities and then their obligations under the Exchange Act and exchange listing standards, all of which require significant preparation, particularly for private companies as consideration of the points in the release demonstrate.

Restrictions: Restrictions apply to shell companies but not others. These include, for example, a requirement that financial statements for the acquired business be filed within four business days of deal completion – the typical 71 day extension is not available. Similarly, the combined company cannot incorporate Exchange Act Reports into an S-1 registration statement for three years. The combined company will also not be eligible to use Form S- 8 for the registration of compensatory securities offering until at least 60 days after the firm has filed current Form 10information. And, for three-years the new entity will be an “ineligible issuer” under Securities Act Rule 405, meaning it cannot, among other things, be a seasoned issuer, use a free writing prospectus or rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications.

Exchange Act obligations: The Act imposes a number of obligations on the SPAC before the business combination. Those include the books and records obligations as well as the internal control requirements. The former dictate that the firm maintain books, records and accounts in reasonable detail that “accurately and fairly reflect the issuer’s transactions and disposition of its assets,” according to the release. The control requirement mandates that the entity maintain a system of internal accounting controls sufficient to provide a reasonable assurance about management’s control, responsibility and authority over the issuer’s assets.

The Act also imposes other obligations on the firm. Those include annual or interim reporting and certain disclosure requirements. Tin addition, new accounting standards must be adopted. It is essential that the new firm have the necessary expertise to implement these requirements.

Listing standards: If the merged entity is listed on a national securities exchange, it will need to be prepared to comply with the standards of the New York Stock Exchange LLC or The NASDAQ Stock Market LLC. Equally important is the requirement that the standards be maintained. Otherwise, the new firm will face delisting.

The qualitative standards in the exchange requirements dictate that the company have sufficient public float, an investor based and sufficient trading interest to ensure depth and liquidity to promote fair and orderly markets. These requirements also focus on items such as the number of round lot holders, publicly held shares, the market value of the shares and the price.

The qualitative standards incorporated into listing standards are concerned with corporate governance. The requirements typically mandate that a majority of the directors be independent, that there be an independent audit committee that includes directors with specialized expertise and that independent directors oversee executive compensation and the director nominating process. There must also be a code of conduct applicable to all directors, officers and employees.

Finally, if the firm fails to satisfy the listing standards it may receive a notice of non-compliance. The company will then have to file a report on Form 8-K. Non-compliance with the notice may present a material risk which requires additional disclosure.


Since the SPAC is a shell or blank check company, and the merger partner is often a private firm, the Release focuses on the question of preparation for the significant limitations and obligations the new issuer will face. Those limitations and obligations require significant preparation. It is essential that those involved in the transactions assess these points. At the same time, those purchasing shares would do well to consider the significant obligations imposed on the new firm as they consider projections for its future and they consider purchasing shares.

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