SPACs provide an alternative way for private companies to go public, usually without the long process associated with an Initial Public Offering (IPO). A SPAC listing typically involves raising capital from public capital through an IPO for the purpose of acquiring or merging with an existing company (usually a private company). SPACs typically have no commercial operations before acquiring a private company.
While rules may vary by jurisdiction, on listing a substantial part of the gross IPO funds are usually placed in an escrow account and are used to acquire an existing company. Once a target is identified, a simple majority of independent directors and shareholders is required in support of the transaction.
SPAC transactions often involve seller shareholders retaining some interest in the combined entity. Once the acquisition is complete, the combined entity is a publicly traded entity and is governed by a board of directors which often include the SPAC sponsors (or their representatives), and sellers (or their representatives).
The funds are returned if no acquisition is made in two years from listing date.
Companies planning to raise capital through a SPAC transaction should plan their readiness for IPO in advance to ensure they meet regulatory requirements set by the regulators (such as the SEC). Regulators are likely to review the SPAC filings with the same level of scrutiny as it would a traditional IPO. This may include examining the financial position and operating control; character and integrity of the incoming directors and management; compliance history; material licences, permits and approvals required to operate the business; and resolution of conflicts of interests.
Following its IPO, the SPAC’s will experience a significant increase in financial reporting requirements (eg SEC in the US), including filing periodic reports with the stock exchange. Therefore, private operating companies should design systems and processes to ensure that they meet their obligations under regulation once they become a ’listed entity’.
SPAC transactions can give rise to unique financial reporting and accounting issues under International Financial Reporting Standards and US GAAP. Take a look at our publication on Financial reporting and accounting for Special Purpose Acquisition Companies (SPACs).
While a SPAC provides private companies with a new avenue to access public markets and benefit from having wider access to capital, liquidity and experienced managers, it also entails greater regulatory supervision. This includes regular audits and increased financial reporting requirements, internal controls assessments, and measures to make sure the organisation has processes in place to meet public company reporting timelines.
Companies should also focus on setting up systems and processes so that they are prepared and ready to function as a public company. Companies which plan their IPO readiness will be better positioned to complete a capital raise through SPAC successfully.
If you would like to discuss a Special Purpose Acquisition Company or the key accounting considerations in SPAC transactions then please contact Chetan Hans, Partner – financial reporting advisory services, Grant Thornton Singapore.
