Over the past few years, and particularly in the post-COVID era, Special Purpose Acquisition Companies, or SPACs, have become a massively popular vehicle for transitioning a company from being private to publicly traded. SPACs — which are often referred to as “blank-check companies” — raise capital through an IPO for the purpose of acquiring an existing operating company. There were about 250 SPACs that held initial public offerings in 2020, attracting more than $80 billion. This year, more than 700 SPACs have sold about $174 billion worth of shares.
But as SPACs become more common, scrutiny is also increasing. Over the past year, investors have lost money on several high-profile companies that went public through SPACs, such as ATI Physical Therapy Inc. and Nikola Inc. Additionally, as more time passes, insights into the success rate of these blank-check companies are becoming more available. According to a March 2021 study called A Sober Look at SPACs, six SPACs failed to merge, and therefore liquidated, compared to 47 that successfully merged. This amounts to a failure rate of 11% from January 2019 through June 2020.
So, what are some of the reasons SPACs can fail, and how can companies utilize the expertise of consulting firms like Clearview Group to help with public company readiness and guidance on compliance?
Each SPAC generally has a 24-month window to complete a deal to buy a company, which must be approved by a vote of the SPAC shareholders. If a SPAC fails to complete an acquisition within the specified time period, it must dissolve and return to investors their pro rata share of the assets in escrow.
During this two-year timeframe, the SPAC must not only negotiate a deal, but also complete the deal and comply with all reporting requirements. This includes complying with all Securities and Exchange Commission (SEC) filing requirements, which often require complex financial statements and other financial reporting that can take significant time to prepare.
Additionally, new regulations from the SEC are making the process even harder. In response to the increased popularity, the SEC began to look into SPACs earlier this year, and have already made a new rule in which warrants in SPACs owned by early investors need to be declared as liabilities (because money is owed to the investors with a warrant) as opposed to an asset on a company’s balance sheet.
“With the new SPAC considerations, we’ve been seeing more clients come to us for help with the process,” said Nick Chavis, a director at Clearview Group in charge of marketing and sales operations. “SPACs have always been in play, but over the past two years, we’ve seen mature privately held companies and even family-owned businesses getting into the public company space. That transition is a cultural, organizational transformation that can be really challenging for some businesses.”
Clearview Group understands that companies are under tight time constraints and may lack the technical in-house expertise to deliver on critical compliance deadlines when going public. Through the firm’s Accounting & Finance and SOX Consulting Services, Clearview Group bolsters the client’s in-house team with technical experts to support the organization’s SEC Reporting, Technical Accounting, Corporate Accounting, SOX, Management Reporting and Tax needs.
Another one of the main reasons SPACs fail is because many private companies are not prepared to be a public registrant and do not possess the sustainable processes and controls required for public company financial reporting. For example, in the first half of the year, there were 14 federal suits filed against blank-check companies, according to an analysis by Cornerstone Research and Stanford Law School’s Securities Class Action Clearinghouse, more than half of which involved claims that firms were overstating their projections or making false claims about the viability of their products.
That is why any company looking to go public via a SPAC will need to be prepared with audit and reporting procedures, internal controls assessments and processes to meet public company reporting guidelines. Unlike the traditional IPO process, management teams won’t have the opportunity to embark on trial runs while the company is preparing for a SPAC, which means mistakes can be costly and have long-lasting ramifications. Once a company is public, it also must operate in compliance with the regulatory requirements imposed by the securities laws and enforced by the SEC.
For clients that are going through the public company transition process, Clearview Group’s experts provide methodologies to implement or enhance processes in areas that private companies do not require. In addition to SEC Reporting, this includes Technical Accounting, Budget/Forecasting and SOX. These methodologies are customized to each client’s needs based on key factors like size of the company (revenue and number of employees), industry and external auditor.
“Many private businesses can’t keep operating the same way once they decide they want to go public. They have to figure out how to adapt and streamline the way they deliver their service or product,” said Scott Freinberg, director of advisory services for Clearview Group. “There is so much complexity and internal change a company needs to address before they’re ready for any kind of public offering, whether IPO or SPAC. Our job is to help CFOs, CAOs and Controllers understand the people, processes and systems that they need to succeed.”
Looking ahead, the SPAC trend is only just beginning to show its potential (and its potential challenges), and as regulations constantly change, companies thinking of going public can lean on expert consultants like Clearview Group to act as their trusted guide through the whole process. The right expertise will ensure companies feel confident that they have the support needed to traverse the uncharted waters of Wall Street’s hottest trend.
For more about what you need to know about entering a SPAC transaction, please contact Nick Chavis or send us a message.
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