Baltimore-based consultancy Clearview Group breaks down the compliance and regulatory requirements every company needs to prepare for when considering entering into a SPAC transaction, or Special Purpose Acquisition Company.
In recent years, Special Purpose Acquisition Companies, or SPACs, have become a wildly popular vehicle for transitioning a company from being private to publicly traded. In the first quarter of 2021, 320 companies went public globally through SPACs. That’s 10 times more than the first quarter of the previous year.
Forming a SPAC — sometimes referred to as “blank check companies” — is no easy feat, and the possibility of new regulations from the U.S. Securities and Exchange Commission are not making it easier. To prepare, companies are turning to consulting firms like Clearview Group that specialize in public company readiness and compliance for guidance.
The SEC opened an inquiry into Wall Street’s SPAC craze this spring and is now seeking information on how underwriters are managing the risks involved. The SEC also recently issued a guidance proposal that, if approved may require SPACs to in regulatory filings for the value of warrants. Those warrants are contracts that give the holder the right to purchase a certain number of additional shares of common stock in the future at a set price from the company.
“With the new SPAC considerations, we’ve been seeing many more clients come to us for help with the process,” said Nick Chavis, a Director at Clearview Group in charge of marketing and sales operations. “SPACs have always been in play, but more and more over the past two years, we’ve seen mature privately held companies and even family-owned businesses getting into the public company space. That transition is a cultural, organizational transformation that can be really challenging for some businesses.”
How Do SPACs Work?
Simply put, SPACs raise capital through an IPO for the purpose of acquiring an existing operating company. SPACs are typically formed by sponsors — a private equity or hedge fund manager, or a team of successful operating executives — with a certain percentage of invested capital. The remaining percentage is held by public shareholders through “units” offered in an IPO of the SPAC’s shares.
The sponsors price the SPAC IPO and secure funding, with the proceeds being placed into a trust account. Then the sponsor identifies an acquisition target company and begins the merge from private to public company — often called de-SPAC-ing. The SPAC shareholders vote on the acquisition, with those who approve staying on as shareholders in the combined company and those who disapprove receiving their cash back. If the SPAC requires additional funds to complete a merger, it may issue debt or additional shares, such as a private investment in public equity (PIPE) deal.
After shareholders approve the SPAC merger and all regulatory matters have been cleared, the target company becomes a public entity.
The Advantages of SPACs
For one, with a SPAC, the company can get to market without worrying about the timing of the IPO window since the funding is already raised. Target companies can lock in a price so that its value is not affected by market uncertainty. That’s a major benefit given the volatility of the market over the past two years (the CBOE Volatility Index, or VIX, reached a record high in March of 2020).
SPACs also allow existing companies to retain a stake in their business and gain access to increased liquidity, providing a chance to continue raising money, investing in brand awareness or making acquisitions even if they are not ideal candidates for traditional IPOs.
Other benefits to SPACs include lower underwriter fees, a faster process, more flexible deal terms and access to experienced managers in the form of sponsors.
How to Prepare for Compliance and Regulatory Requirements
While those advantages are attractive, it is important to remember that any company looking to go public via a SPAC will need to be prepared with audit and reporting procedures, internal controls assessments and processes to meet public company reporting timelines. Once a company is public, it also has to operate in compliance with the regulatory requirements imposed by the securities laws and enforced by the SEC.
Unlike the traditional IPO process, management teams won’t have the opportunity to embark on trial runs while the company is preparing for a SPAC, which means mistakes can be costly and have long-lasting ramifications. Consulting firms like Clearview Group can provide the administrative resources, infrastructure and discipline to help companies avoid those mistakes.
“Many private businesses can’t just keep operating the same way once they decide they want to go public. They have to figure out how to adapt and streamline the way they deliver their service or product,” said Scott Freinberg, director of advisory services for Clearview Group. “There is so much complexity and internal change a company needs to address before they’re ready for any kind of public offering, whether IPO or SPAC. Our job is to help CFOs, CAOs and Controllers understand the people, processes and systems that they need to succeed.”
Clearview Group uses a multi-faceted approach to help companies overcome the challenges associated with IPOs and SPACs, such as analyzing pre-and-post acquisition risk, understanding Sarbanes-Oxley (SOX) and other compliance matters, as well as providing adequate staffing or advising on infrastructure.
In order to execute a SPAC successfully, private companies need to be prepared and ready to operate as a public company. As SPAC activity continues to grow and regulations change, companies thinking of going public should enlist the help of expert consultants like Clearview Group to act as their trusted guide through this transformation process. With the help of the right expertise, companies will better be able to traverse this emerging trend within the public markets.
For more about what you need to know about entering into a SPAC transaction, contact: firstname.lastname@example.org.