In the first part of our two-part series on “Simplifying SPAC Mergers”, we talked about what SPACs are, what they mean to different stakeholders, and how they differ from traditional IPOs. In this second part, we will shed light on the accounting and reporting considerations that you have to keep in mind when you opt for a SPAC, so you can quickly and efficiently gather the funds you need to capitalize on a merger or acquisition opportunity – within the defined time frame.
Financial reporting considerations
Given that SPACs raised a record $76.2 billion in 2020, up 557 percent from 2019, they are a hot topic for investors, acquirers and sellers alike. Reports state that SPAC stocks have delivered average annualized returns of about 17.5 percent since 2015, providing an efficient way for private companies to tap public equity markets.
But despite the success, SPAC mergers aren’t straightforward. Although SPAC opens doors to several benefits, there are some intricacies that need to be understood and requirements that need to be addressed for optimum results.
Since any company going public via a SPAC must meet some extensive regulatory requirements, it requires organizations to overcome an array of complex challenges that range from vetting potential SPAC suitors, understanding the tax structure, ensuring public company readiness, enabling sophisticated business forecasting and more. Here are some financial reporting considerations to keep in mind for quick and sustained SPAC success:
- PCAOB compliance: Since SPAC shareholders are required to vote on the transaction, the proxy and registration statements need to comply with public-company GAAP disclosure requirements, SEC rules, and requirements, and also be audited in accordance with PCAOB standards.
- Number of years required: When raising capital through SPAC, it is important to note that the proxy/registration statement must include the target’s annual audited financial statements for three years – with exceptions for smaller reporting companies and emerging growth companies.
- Staleness: Given the fact that the entire SPAC process might take months, financial statements may no longer meet the original requirements. Such “stale” statements need to be updated either before an amendment is filed, the registration statement is declared, or a proxy statement is mailed.
- New disclosures required: Once a transaction is closed, SPAC targets need to ensure that internal controls over financial reporting are well established and maintained along with disclosure controls and procedures
In addition to financial reporting requirements, companies also need to be aware of certain SEC regulations. These include:
- Proforma: When planning for SPAC, companies must present proforma financial information that reflects the accounting details for the transactions – including balance sheets and income statements – for the most recent fiscal year as well as any interim period included in the proxy/registration statement.
- MD&A: The target company is required to prepare an MD&A disclosure for all periods presented in the financial statements, allowing investors to understand the company’s financial condition and results of operation.
- SEC comments: In the SPAC process, the SEC furnishes a letter of comment to assist the issuing company. Companies need to address SEC comments while pursuing their SPAC transactions and comply with the proposed rules, amendments to rules, or concept releases.
- Rule 3-05 reporting: SPAC mergers also necessitate abiding by Rule 3-05 that requires companies to furnish separate audited annual and unaudited interim pre-acquisition financial statements of the business.
- Quarterly/annual financial reporting: Post-listing, the target company is required to conduct quarterly/annual financial reporting and declare the results on forms 10-Q and 10-K.
- Technical accounting for new transactions: After a SPAC merges with a target company, the latter’s financial statements end up becoming the combined company’s statements. This means the target company needs to ensure that due attention is given to the technical accounting and reporting matters, once the merger is successful.
- SEC Commentary: With the SEC constantly amends the letter of comment, it is vital for organizations to keep a watch for the SEC commentary – even after the shares have been publicly listed. This is important to safeguard the company as well as the SEC in the event of any errors or inconsistencies, as well as protect investors from any misleading or inaccurate information.
- Investor communication: The target company also needs to constantly forge communication with the investors to gauge the progress of the SPAC journey, set appropriate expectations, and smooth transition towards becoming a credible, public-facing company.
SPAC mergers offer specific advantages over traditional IPOs that make them an extremely sought-after option to raise capital. By allowing companies to raise more funds quickly and efficiently, they help propel innovation across a range of industries.