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5 key considerations for SPAC transactions

2020 was a record-breaking year for IPOs of special-purpose acquisition companies (SPAC). In 2021, that record was surpassed in the first quarter by raising $98.6 billion. As this success of SPAC transactions continues, the popularity of SPACs to raise capital rather than using traditional IPOs has also been on the rise.

When a SPAC merges with a private operating company, they become a combined public company. Their financial statements will also need to be consolidated, which necessitates significant time and resources for accounting and compliance reporting. These statements are expected to comply with public-company GAAP disclosure requirements as well as SEC rules and requirements.

Recently, SEC has issued a statement in March 2021 that SPAC dealings will have to go through the same monitoring processes as regular IPOs. According to this announcement, five key considerations will need to be taken into account for SPAC transactions:

  1. Market and Timing

The company which is to be merged with the SPAC will have to think about and pay close attention to changes needed in staff, procedures, and technology to comply with SEC reporting, audit, tax, governance, and investor management once the SPAC takeover is complete.

  1. Financial Reporting

The combined entity has to choose which of the merging companies has the main financial interest in the combined company according to various factors like voting rights, board or management control, relative sizes, equity interests, etc.

Reporting requirements for the merged company and fixing new dates for changing accounting standards have to be decided.

  1. Internal Control

Planning needs to be done to decide new systems, people, and software for internal reporting requirements to be met after the merger.

  1. Corporate Governance and Audit Committee

The corporate board and the audit committee should jointly supervise to see that a company provides high-quality financial reporting.

  1. Auditor Requirements

SPAC dealings have to go through extra audit systems to fulfil the needs of SEC and PCAOB.

Other essential conditions for a SPAC Transaction:

Further, the company which is being merged or taken over should also take into account the following technical accounting and SEC reporting considerations:

  • Age of Financial Statements
  • Financial Statement Presentation for Reverse Recapitalizations
  • Accounting for Shares and Warrants Issued by a SPAC
  • Unit of Account
  • Classification of Class A and Class B Shares
  • Public Warrants
  • Private Placement Warrants
  • Accounting for Issuance Costs
  • Consolidation of SPACs
  • Classifying Share-Settleable Earn-Out Arrangements
  • Unit of Account
  • Indexation
  • Equity Classification Conditions
  • Share-Based Payment Considerations

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