Special purpose acquisition company investments

A potentially quick deal strategy if you know the risk and tradeoffs

A special purpose acquisition company (SPAC) is a public listing vehicle that acquires a stake in a targeted company, most often privately held, enabling the private company to go public through an alternative route to a traditional initial public offering. Depending on the nature of the arrangement, the transaction may be accounted for as either a reverse-merger (when the target company is deemed to retain control) or a business combination (when the SPAC is deemed to obtain control) for accounting purposes.

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According to an August article by Bloomberg, 40% of all companies that have gone public in 2020 did so through SPACs. The recent popularity of SPACs is likely because SPACs are perceived to represent a quicker and more streamlined approach to public liquidity. Yet SPAC deals are not necessarily simple.

The U.S. Securities and Exchange Commission chair indicated that the SEC wants to make sure that shareholders are “getting the same rigorous disclosure that you get in connection with bringing an IPO to market.” And, while the timeline to go public is often shorter than a traditional IPO, most all of the same activities needed to go public must still be completed, except on an extremely truncated timeline.

The importance of the right partner

Therefore, SPACs and SPAC targets often find it beneficial to collaborate with a partner who can help advise and assist them throughout the merger process: from pre-merger, to the process of merging the SPAC with the target company (de-SPAC process), and as a public company post-merger. RSM US LLP has experience in not only collaborating with SPACs and their target companies, but also coordinating and driving the merger process forward with other service providers including legal counsel and third-party auditors.

The de-SPAC process itself can prove to be particularly challenging for companies in complying with the requisite finance and reporting requirements. Additionally, during the de-SPAC process, when the greatest amount of effort is required of the target’s financial team, the target’s CEO and chief financial officer are often tasked to support and participate in pitches to secure additional funding, which can leave the target shorthanded from a leadership standpoint.

The RSM difference

RSM has assisted many companies through the SPAC merger process, with everything from preparation of financial statements in accordance with public company accounting standards, to “unwinding” historical private company accounting policies, to assisting with the preparation of the provision for income taxes, among others. RSM can also assist with other initiatives as part of the company’s transition to a public company such as enhancing the company’s internal control program to comply with Sarbanes Oxley 404 or upgrading or implementing new enterprise resource planning systems. Our cross-functional team of seasoned professionals is ready to assist.

Through our work with many SPACs and SPAC targets, we have developed a playbook which has guided companies through successful mergers. Our core approach to the de-SPAC process is centered on three main workstreams:

  1. Re-audit in accordance with Public Company Accounting Oversight Board standards – It is not uncommon that the target be required to provide two to three years of financial statements which have been audited under PCAOB auditing standards. The process of re-auditing the financial statements under PCAOB standards is often the most demanding and longest individual workstream in the de-SPAC process. RSM has experience in supporting and augmenting target company accounting staff to expedite the process overall.
  2. Financial statement conversion – While the PCAOB re-audit is underway, the target will need to focus on converting its financial statement from being prepared in accordance with private company accounting standards to being prepared in accordance with public company standards. This often includes preparing additional disclosures such as those related to earnings per share (EPS), segments, revenue disaggregation and other reporting adjustments to conform to public company accounting standards.
  3. Draft registration statement – As the initial filing date approaches, the attention will quickly turn to preparation of a draft registration statement and/or proxy statement. At this point, it is critical to have coordination amongst the target, the SPAC, legal counsel, auditors, and other accounts and service providers. In addition to assisting management with preparing the SEC Regulation S-X Article 11 pro-forma financial statements, management’s discussion and analysis of the financial statements, and other items, RSM can also provide overall project management services to ensure the collaborative effort stays on track and on time.

A SPAC merger transaction, from signing of a letter of intent to going effective with the SEC, can be generally be completed within a few months; a traditional IPO can take many months or even years before going effective on a public market.

RSM’s experience in helping companies through accounting for the de-SPAC process is illustrated below in this simplified project timeline.

Working with RSM gives you the confidence to move forward as a public company, knowing you’ve assessed the risks and addressed the compliance and reporting aspects to succeed as a public company.