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SPACs or Special Purpose Acquisition Companies is the latest buzz word in financial markets. SPACs are “Blank Cheque Companies” which are essentially shell companies that undertake an IPO with the objective of using the capital raised for acquiring an operating company within a set time frame (18-24 months) - the acquisition transaction is referred to as “de-SPACing”.
The frenzy around SPACs can be gauged from a few statistics. The calendar year 2020 saw 248 SPAC IPOs, raising USD 83 billion. In just first four months of calendar year 2021, 311 SPAC IPOs have been concluded, raising USD 101 billion and another 272 SPAC IPOs are in the pipeline, to mop up USD 68 billion from investors.
As of April 2021, 427 SPACs are searching for their initial business combination (i.e. de-SPACing), with 19.3 months remaining before their deal deadline on an average. These 427 SPACs have dry-powder worth USD 138 billion, ready to be deployed. 29 SPACs have already consummated business combinations in 2021 so far, with Enterprise Value of USD 61 billion.
Experience shows that an average SPAC raises about USD 325 million in its IPO. Basis analysis of data for 29 business combinations in 2021 so far, it is seen that an average SPAC consummates a business combination roughly 5 times (5x) the size of its IPO, though the deal sizes range from 1x to 11x (in couple of isolated cases, the deal sizes were whopping 21x and 38x!)..
As companies strive to become eligible targets for SPACs, two critical considerations should be on the top of their minds right from the word “Go” – (1) optimum tax structure and (2) financial reporting requirements, for the de-SPAC transaction.
While the former has a direct impact on the cash flows of existing shareholders of the target, the latter is a complicated and time-consuming process, with several interpretational folds to be ironed out. This article is an attempt to simplify the latter.
The de-SPAC transaction involves three broad phases, spread over a 6-9 months timeframe after the identification of target:
Stage 1: Pre-deal Letter of Intent (LOI) from a SPAC to the target followed by a due diligence by the SPAC sponsors on the target.
Stage 2: Approval of business combination by SPAC’s shareholders, which is preceded by the SEC’s approval of the proxy statement (Form S-4 or F-4) containing financial information of the target.
Stage 3: Consummation of the business combination followed by filing of “Super 8-K” or “Super 20-F” within 4 days of the transaction closing, with updated financial information of the target.
As a general rule, audited P&L and cash flows for latest 3 fiscal years and audited balance sheet as at the end of latest 2 fiscal years are required.
In three exceptional cases, only 2 years of audited financial statements are required:
FPI exception: Post de-SPAC entity qualifies to be a Foreign Private Issuer (FPI) which, in turn, primarily depends on the shareholding structure of the SPAC after the business combination;
SRC exception: Target company meets the requirements to be a smaller reporting company (SRC) if it were an issuer itself i.e. the target should have revenues of less than USD 100 million as per its latest annual financial statements; and
EGC exception: SPAC is an Emerging Growth Company (EGC) and target would be an EGC if it were conducting its own IPO, provided SPAC shouldn’t have made its first annual filing yet.
EGC is a special category of companies under US laws which fulfil three requirements – (1) revenue less than USD 1.07 billion (2) non-convertible debt issued in last 3 years less than USD 1 billion (3) public float less than USD 700 million.
Let’s talk about the staleness rule i.e. when does old financial information become ‘stale’? This depends on whether the post de-SPAC entity is a domestic registrant or an FPI. In case of domestic registrants, target’s financials for FY 2019-20 become stale after 15 May 2021 (i.e. 45 days from latest year-end), beyond which target’s financials for FY 2020-21 are required to be filed.
For FPIs, the FY 2019-20 financials don’t go stale upto 30 June 2021 (i.e. 3 months from latest year-end). In addition, for domestic registrants, beyond 12 August 2021 (i.e. 134 days from latest year-end), even the FY 2020-21 financials will become stale and will have to be supplemented with interim financials for the subsequent period..
For FPIs, that cut-off date will be 31 December 2021 (i.e. 9 months from latest year-end).
Indian companies follow the legacy IGAAP or the more recent Ind-AS – both are closer to the International Financial Reporting Standards or IFRS, though each to a different extent.
However, the accounting standards Indian companies are used to, are quite far from USGAAP. Naturally, Indian companies will prefer IFRS, only if they could choose!
This choice again depends on the same question – whether post de-SPAC entity is domestic registrant or FPI? As a general rule – domestic registrants have to follow USGAAP and FPIs are permitted to follow IFRS. Exercise of the right choice about GAAP can significantly reduce the length of journey for target companies.
Target companies should also brace to prepare proforma financials for any business combination they may have recently consummated or are in the process of consummation as well as GAAP compliant financials of the businesses so acquired/sought to be acquired.
The US securities markets regulator, Securities and Exchange Commission (SEC) has recently halted the SPAC frenzy by coming out with a new accounting rule requiring SPACs to classify their warrants as a liability in their financial statements instead of equity.
This halt in the SPAC activity has come as a reality check - the pool of capital available is not unlimited and therefore worthy targets for acquisitions will need to quickly get their acts together, lest the dry powder of USD 138 billion is blown away.
Financial reporting is a significant piece in the attractive jigsaw puzzle of SPACs. Aspirant targets cannot afford to take the plethora of accounting requirements and strict auditing standards of PCAOB lightly.
A comprehensive, detailed time-table and an experienced task force to drive the de-SPAC process can keep the targets ahead in the game and ensure their stakeholders realise their dreams of taking the business public.
The article was published on CFO.economictimes.