Going the SPAC route and how it hits your accounting, Pt. 1

SPACs (or Special Purpose Acquisition Companies) have exploded in the business scene, gaining global popularity in 2020 and 2021. Providing a less-intensive path to the traditional IPO process, nonpublic businesses have more options to go public than ever before. While going public is now in sight, there are still significant financial challenges to be considered as you begin the SPAC process. In this two-part series, I will explain a common SPAC scenario and the possible risks to assess when deciding to take the SPAC route.

SPACs are the hot topic of today’s investment world – and with reason. The prospect of an alternative and faster method to go public brings the opportunity for a strong exit to many owners and investors of privately held business, compared to the lengthy and time-intensive traditional Initial Public Offering (or IPO) route. Popular as SPACs may be, let’s break them down.

What is an SPAC and what does it do?

Consider a growing manufacturing business called Rapid Products. Rapid Products is doing very well, and its private owners have always considered taking the company public. However, the traditional IPO route to get listed as a publicly traded on the stock exchange is an extremely harrowing process with excessively high costs for countless legal and regulatory filings. In addition, there will be a 9-to-12-month timeline of back-and-forth with the Securities and Exchange Commission (SEC) and related regulatory bodies for the necessary approvals, making this route prohibitive.

Meanwhile, a separate group of investors have formed an SPAC (reminder: that’s a special-purpose acquisition company) and registered it as a publicly traded company; let’s call it SPC Co. This SPAC is a very simple company to register and maintain with the SEC; there’s nothing contained within the entity other than a large sum of cash from its investors. Now, let’s say that the investors of SPC Co. have become aware of Rapid Products and its strong potential. The investors ask if there is interest in SPC Co. purchasing Rapid Products as a “target company.” A few months later, the sale closes, and Rapid Products is now wholly owned by, or merged with, the public company SPC Co., and has full access to the public market. The process took significantly less time than it would have taken through a traditional IPO, giving the former owners of Rapid Products the opportunity to exit their company in its prime.

Quicker access to the public market and less red tape; what could go wrong? A common pitfall for potential SPAC target companies is the assumption that business can run as usual during this process. However, there is more rigid regulation from the SEC for publicly traded companies. Further, the accelerated timeline to become public brings yet another challenge.

Next week, we’ll look at three key challenges that a company’s leadership faces for their accounting and finance departments as they decide if they should take the SPAC route.

In the meantime, are you or your company currently considering a SPAC transaction in 2022?