SPACs and IPOs
Special purpose acquisition companies or SPACs are clearly the fashionable way go public these days. While the traditional manner would involve the filing of an S-1 registration statement and a road show to generate interest which can be costly and time consuming, or perhaps a reverse merger with an existing shell which can be quick and easy, now the preferred approach is the SPAC. Although a blank check company – now called a SPAC – was once disfavored it is now the vehicle of choice. This is particularly true if it is tied to a well know investor or a celebrity. Indeed, SPACs accounted for about half of the 2020 IPOs.
Perhaps the best measure of the interest in SPACs is the recent Division of Corporation Finance statement on the vehicle. Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies (March 31, 2020)(here). The statement focuses on key points that a private company should consider before engaging in a transaction with a SPAC.
Shell Company Restrictions: There are a series of limitations that apply to a SPAC which require evaluation. Those include the following:
· Financial statements for the combined firm must be filed within four business days of the completion of the merger; the typical extension is not available
· The merged entity cannot incorporate Exchange Act Reports by reference into an S-1 for three years
· Form S-8 cannot be used for the registration of compensatory securities offering until 60 days after the entity files its Form 10
· The new entity will not be able to use Rule 405 for three years after the deal
Books and Records and Internal Controls: The Exchange Act reporting obligations apply. This means that the books and records must be maintained in reasonable detail that accurately reflects the issuer’s transaction. The requirement also means that the internal control provisions must be met. According, the new issuer will be required to devise and maintain internal controls sufficient to “provide reasonable assurances about management’s control, authority, and responsibility over the issuer’s assets. These requirements apply to the SPAC before the business combination.
Following the merger, the emerging firm will “need the necessary expertise, books and records, and internal controls to provide “reasonable assurance of its timely and reliable financial reporting.” A private operating firm may have viewed the necessity for such expertise differently prior to the business combination.
Initial listing standards: After the merger the combined entity will be required to comply with the listing requirements of either the New York Stock Exchange or the NASDAQ Stock Market, if a listing is obtained on either. The firm should carefully consider how it will undertake compliance and avoid the prospect and risk of being delisted. Those requirements generally include quantitative and qualitative components. The former are designed to ensure that the company has sufficient public float, investor base and trading interest to assure an orderly market. The latter focus on corporate governance and items such as having a majority of independent directors, an independent audit committee that include the required specialized experience. Failure to comply with these requirements can trigger a notice that the firm may be delisted or constitute a risk requiring disclosure under Regulation S-K.
Using a SPAC often appears to be the sure, easy path to an IPO and a public company. Perhaps. But as the statement from the Division of Corporation Finance demonstrates, it also takes careful preparation. For those participating in the merger, as well as investors, there may be other considerations such as how long the promoters will remain with the entity, a point detailed in a New York Times article dated April 1, 2021 by Andrew Ross Sorkin. In the end a SPAC may be the way to go if proper preparation is undertaken.