Special Purpose Acquisition Companies (“SPACs”) have been all the rage lately — attracting billions of dollars from investors and launching a record number of IPOs — but what are some considerations companies looking to partner with a SPAC must consider in determining if this structure is right for their company. Cherry Bekaert’s Accounting Advisory Leader, Chase Wright, attended SPAC Conference 2021, a two-day event billed as the largest forum for networking and discussion of SPACs and alternative IPO techniques and has provided his 5 key takeaways:
1. SPACs or “Blank Check Companies,” Will Continue to Be a Viable Way to Access the Public Markets into the Foreseeable Future
A SPAC transaction is a highly complex undertaking, especially for middle-market business owners looking for liquidity from their business. However, the attractiveness on both the buy- and the sell-side have led to a spike in SPAC IPOs and M&A activity.
Buyers are attracted because SPACs are another vehicle to create deal flow. Sellers gain faster execution than a traditional IPO; engagement with investors on pricing and valuations earlier; less reliance on historical information and more focus on the current state; and making it easier for less mature companies to access the public markets.
Selling to a SPAC can be challenging, but it remains a viable option into the foreseeable future.
2. Sponsors Are Actively Looking for Opportunities to Make a Deal
With significant dry powder in hand, sponsors are busy looking for investment opportunities in an increasingly crowded space. At the end of the first quarter, there were reportedly 400+ blank check companies with over $118 billion in capital actively seeking deployment opportunities.
Faced with intense competition, deadline pressures and a volatile market exacerbated by COVID-19, SPACs are in hot pursuit of targets to merge with and take public. SPACs typically have between 18-24 months after the IPO to consummate a combination with a target company – typically referred to as the “De-SPAC” transaction. Sponsors are looking for visionary entrepreneurs with outstanding technologies who are beginning to execute their business plan that differentiates them from their competition.
3. The Recent Explosion of SPACs Has Created Increased Scrutiny on the Part of the SEC
The unprecedented uptick of SPAC IPO volume in 2020 and the first quarter of 2021 has created a lot of interest in the markets on all sides: sponsors, sellers, investment banks, deal advisors and, yes, the SEC. At the end of 2020, the SEC’s Division of Corporation Finance (Corp Fin) released guidance related to its views about certain disclosure considerations for SPACs in connection with their IPOs and subsequent business acquisition transactions. In the guidance, Corp Fin stated that the economic interests of insiders forming a SPAC (sponsors, officers, directors, and affiliates of a SPAC) may differ from the economic interests of public shareholders, which can lead to conflicts of interests.
SEC Senior Staff has also expressed concerns about having adequate disclosures surrounding the target company in the de-SPAC process. And more recently, the SEC Staff has issued a public statement on accounting and reporting considerations for warrants issued by SPACs in connection with its formation and initial IPO (see, Cherry Bekaert’s Alert on SPACs Warrant Accounting and Disclosure Liability Issues). Until last week, second quarter activity paled in comparison to the first quarter; however, sponsors and target companies are adjusting to these new rules of engagement and SPAC activity resumed in earnest last week (week of June 20 – 26th).
4. SPAC Litigation Risks and Other Challenges
While the SEC has been taking a harder look at SPACs and the pace of new SPAC deals showed signs of slowing in the second quarter of 2021, there are other challenges to consider, including SPAC litigation risks. With increased scrutiny, SPACs and SPAC targets are seeing a rise in SEC inquiries and stockholder lawsuit chatter.
In particular, there are increasing concerns that private plaintiffs may assert claims against the SPAC and/or the target and the target’s board of directors for abetting SPAC directors’ breaches of fiduciary duties. If there are conflicts of interests or inaccurate projections, lawsuits may allege claims under state law for conflicted transactions and securities fraud under the federal securities laws. SPAC targets with controlling stockholders could also face controller claims if those in control of the target receive different consideration than others in the de-SPAC transaction.
In addition, directors and officers (D&O) insurance carriers are also adjusting their premiums and policy terms to account for these increased risks. Such rising concerns are only heightened by recent news reports of gaps in certain deals between returns for insiders versus later investors who suffer losses after a company becomes public.
5. Having the Right Deal Advisors Can Make All the Difference
Having the right advisors is a crucial part to the process, both on the buy-side and the sell-side. It is important to have the right legal, accounting and financial advisors to manage the process from creating the SPAC to identifying and executing deals. Cherry Bekaert is particularly well-suited to provide advisory services to private companies seeking to partner with a SPAC, including conducting PCOB audits, projections, quality of earnings, disclosure requirements, acquisition accounting, and internal controls and other compliance requirements.
For more information on SPACs or if you have any questions, we encourage you to contact us at SPAC@cbh.com.
Related Insights
