Key considerations for companies envisaging SPACs

Special purpose acquisition companies (SPACs) are not new investment options, but their popularity has grown dramatically in recent years, as a vehicle for private entities to merge with an existing public shell or “Blank Check Company.” This type of merger is often more attractive than a traditional initial public offering due to the perceived ease of merging with a SPAC. Prominent underwriters and investors have also become more attracted to SPACs due to the relative speed in which deals are consummated. In 2020 alone, more than 50 SPACs were formed in the United States, raising more than $21.5 billion. As of August 2021, SPACs have raised more than $117 billion [1].

Private companies going through the SPAC process will need to consider the extensive process prior to the SPAC deal being finalized. These companies will be required to have their financial statements (typically two years of audited financial statements) audited under the standards set forth by the Public Company Accounting Oversight Board (PCAOB). Oftentimes these companies find that their current firm may not be independent under the PCAOB standards (prior independence under AICPA standards is much different). Management teams will also work alongside the SPAC’s management team in order to prepare the required proxy and legal registration statement in the Form S-4. There are several considerations during the initial planning phase that boards and management teams need to take into account prior to this process. For instance:

Negotiation and merger agreement

Have you identified the right SPAC? Has management discussed the future of the company? Selecting the right SPAC is the most critical of all the steps. When companies go through the process of going public, but they do not have an acquisition agreement in place with a SPAC, hiring various external resources and professional firms may be costly and the company can run the risk of the high cost of these resources affecting or possibly even ruining the SPAC deal and leaving the company with costs that it cannot recover. On average, a company will need to budget for a substantial increase in legal, accounting and consulting costs, which is discussed in detail below.

Quality of financial statement and supporting information

More often than not, companies that are not public and have not gone through the scrutiny of an external audit do not have a strong system in place as it relates to their financial statements, whether it’s a process around month-end close, financial disclosures, accounting memos, processes and procedures, internal controls or even a comprehensive accounting staff. When the initial planning phase of the SPAC process is occurring, companies will need to do a thorough internal examination of the overall quality of the company’s books and records. Management should assess the practicality of the company being able to achieve an unqualified audit opinion from a PCAOB audit. Should a company find any of the elements previously mentioned as a point of concern, the company should address these deficiencies first before hiring an external audit firm. These aspects will be highlighted by the external audit firm as significant deficiencies and could be the determining factor as to whether the company receives a Qualified, Unqualified or Adverse audit opinion.