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11/13/2020
Going public as a SPAC target company: What to consider and how to prepare
"Management teams need to be prepared to handle a two-pronged transaction process. Financial due diligence and public company readiness together will require a focused effort. They’ll need to plan reasonable time and resources to maintain current operations and prepare for the transaction at the same time." - Claudine Cohen, Managing Principal, Transactions & Turnaround Advisory
If you’re the leader of a privately owned company, you may find that your business becomes an attractive acquisition target for a Special Purpose Acquisition Company (SPAC), a company created to raise capital through an initial public offering (IPO) in order to buy another company. SPACs have raised over $63 billion so far in 2020, according to data from SPACInsider, and they have a finite window of opportunity to put that money to work.
Being acquired by a SPAC can present opportunities for target companies, but the process and subsequent transition to public-company status can be tricky, too. Read on for what to consider before entering into such a deal and how to prepare if you decide to move forward.
Going public: Are SPACS the right path for you?
Going public through a traditional IPO can be an exciting and rewarding experience for your company, offering a powerful tool that can help you achieve your capital, liquidity, and related needs. But it’s also an enormous undertaking. Too often, business owners make the mistake of underestimating the commitment of resources needed to conduct a successful IPO and to operate as a public company thereafter.
Being acquired by a SPAC can be an attractive alternative to a traditional IPO or other capital-raising platform. That’s because a SPAC will already have the structure ready to operate as a public company, offering a shell for the acquired company to merge into and a less-challenging go-public pathway as compared to a traditional IPO. However, like all major financing transactions, a successful SPAC acquisition is complex and involves significant costs, effort, and thorough due diligence.
As you analyze capital-raising options, it’s critical to keep in mind that going public is not an end in and of itself, but rather a means to an end. Like any form of financing, a SPAC transaction should be viewed as a tactical response to a strategic need. As your company grows, it may reach a point in its life cycle where going public becomes the most effective way to raise the capital it needs to deliver on its business plan and meet liquidity needs.
Getting ready for a SPAC transaction
One of the greatest challenges faced by management teams as they prepare to be acquired in a SPAC transaction is effectively handling the due diligence process while simultaneously preparing to become a public company – all under very strict time constraints. (In general, SPACs have roughly two years to complete their intended acquisitions, or else they face dissolution.) Additionally, the moment a company becomes public, it is subject to heightened requirements related to corporate governance, internal controls, external financial reporting, and regulatory compliance. Even in a SPAC transaction, going public isn’t just a matter of flipping a switch – it’s a complete rewiring of your company to function effectively in a public-company environment.
Specific preparation and reporting considerations for target companies include:
- Company readiness: A target company will need to prepare itself for being a public company quickly in terms of accounting, financial reporting, human resources, etc. A robust, cross-functional project management plan should also be prepared.
- Tax structuring: There may be restructuring activities by a private target company prior to merging with a SPAC. In addition, and as a result of a SPAC transaction, the target company will be legally owned by the SPAC. Accordingly, a SPAC transaction may have an impact on tax status.
- Reporting requirements: The SPAC will make certain filings with the Securities and Exchange Commission (SEC). Accordingly, certain pro-forma financial information, as well as certain audited annual financial statements and, depending on transaction timing, certain unaudited interim financial statements of a target company, will generally be filed with the SEC. Such information will also be included in a Form 8-K required to be filed within four business days after the closing date of the SPAC transaction. Further, this information may need to be updated. It is important to incorporate the due dates of regulatory reporting requirements into your expected transaction timeline.
- Financial statements: Target financial statements should be presented in conformity with applicable generally accepted accounting standards and follow requirements of the SEC. Accordingly, certain public company reporting, such as Management’s Discussion and Analysis (MD&A), will also be required. After the transaction, the SPAC will be subject to ongoing SEC reporting requirements.
- Additional considerations: The SEC generally requires three years of financial statements. However, a public company that qualifies as a Smaller Reporting Company (SRC) or Emerging Growth Company (EGC) is required to present two years of financial statements. Further, there are other permitted accommodations available to SRCs and EGCs, including with respect to ongoing reporting requirements. Be sure to plan ahead and give yourself enough time to understand these issues and to position your company for this transition.
A SPAC transaction is a significant undertaking that offers the potential for significant rewards. Weigh the advantages and disadvantages. If you decide that taking your company public through a SPAC transaction is the right strategy, start planning right away for this major event in your company’s life cycle. Not only is preparation key, it’s also essential in minimizing the impact of the process on your ability to manage your company’s day-to-day affairs as you make this important transition.
Contact
Swami Venkat, CPA, CISA, CFE, ACA, Partner, CFO Advisory Leader, CohnReznick Advisory
973.871.4044
Marisa Garcia, CPA, Partner, CohnReznick Advisory
646.601.7786
Subject matter expertise
Marisa Garcia
CPA, Partner, CohnReznick Advisory
Swami Venkat
CPA, CISA, CFE, ACA, Partner, CFO Advisory Leader
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SPACs: Alternative to Traditional IPO
Going Public: SPACs Offer a Capital Raising Alternative For Private Companies
Phases in the Lifecycle of a SPAC
Post-SPAC Transaction: Challenges and Benefits of Operating as a Public Company
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.