Navigating SPAC Mergers: A Viable Alternative to Traditional IPOs

ARTICLE | March 27, 2024

In recent years, Special Purpose Acquisition Companies (SPACs), also known as “blank check companies”, have emerged as a popular and speedy alternative to traditional IPOs. The rise of SPACs has opened up new avenues for companies, especially small to mid-sized,  to go public. SPACs offer some benefits over traditional IPOs, including shorter timelines, lower fees, and increased availability of funds. However, SPACs also come with some challenges. This article aims to shed light on the mechanics of SPAC mergers, their implications, and the accounting complexities they bring along.

Understanding SPACs

A SPAC is a shell company with no commercial operations, which is formed with the sole intention of raising capital through an initial public offering (IPO) to acquire or merge with an existing company. The target for acquisition is typically unidentified at the time of the IPO, earning SPACs their nickname of “blank check companies”. The past couple of years have witnessed an upsurge in SPAC IPOs, making SPAC mergers a trend to watch in the coming years.

The SPAC Merger Process

Once a target company is identified post-IPO, the SPAC merger process, often referred to as de-SPACing, is initiated. This involves several steps, including securing shareholder approval, offering redemption to public shareholders, sourcing additional financing if necessary, and filing requisite financial and legal documents with the SEC. Once a target is identified, the de-SPACing process could be completed in as little as 5 months.

Challenges in SPAC Mergers

SPACs present an accelerated timeline for mergers, which, while advantageous, also introduces several challenges. These include but are not limited to equity restructuring, fulfilling SEC requirements, and preparing the target company for life as a public entity.

Equity Restructuring: The target company may need to undertake restructuring that could impact its tax status. This requires careful planning and expert guidance to ensure the company’s financial health.

SEC Requirements: Both the SPAC and the target company must fulfill extensive reporting requirements, including historical financial statements and pro forma financial information.

Public Company Readiness: The target company has a shorter period to prepare for life as a public entity compared with a traditional IPO. This includes preparing financial statements with expanded disclosures, evaluating, documenting, and implementing internal controls, and implementing new risk management policies.

The Role of Accounting in SPAC Mergers

The accounting functions of target companies need to ramp up quickly to comply with the requirements of the merger process, SEC filings, and life as a public company post-merger. Expert accounting advisors play an instrumental role in ensuring all accounting and reporting requirements are fulfilled accurately and promptly to avoid any delays in the merger process.

Embracing SPAC Mergers

While the SPAC merger process presents a unique set of challenges, with the right guidance and expertise, it can be a lucrative alternative for businesses considering an IPO. As SPACs continue to gain traction, understanding their dynamics and implications becomes crucial for companies looking to make the most of this trend. With the right strategic planning and expert guidance, SPAC mergers can pave the way to a successful future as a public company. Contact Insero’s Technical Accounting and Consulting Group to learn how we can help target companies navigate the process.