If you’re in the world of finance, you’ve no doubt recently read about SPACs and have probably wondered what they are and whether they can be traded. In the previous year, a record activity of Special Purpose Acquisition Company (SPAC) was recorded. While the U.S. was the most prominent market for SPAC activities, new regulations were introduced in markets such as Hong Kong and Singapore to promote SPAC ads and capital market activities.
What is SPAC?
SPAC stands for Special Purpose Acquisition Company. As the name implies, a SPAC is a company established solely for the purpose of acquiring one or more companies and bringing them to public markets, helping them to avoid the First Public Offering process, i.e. the IPO. Private companies that want their shares traded on stock exchanges must go through a process called First Public Offering (Securities). The SPAC list usually involves raising funds from public capital through an IPO for the purpose of acquiring or merging with an existing company (usually a private company).
Although the rules may vary depending on the law, when listing, a significant portion of gross IPO funds is usually placed in an escrow account and used to acquire an existing business. Once the target has been identified, the consent of the majority, which includes independent directors and shareholders who support the transaction, is required. SPAC transactions often involve shareholders who retain a portion of the interest in the combined entity. Once the acquisition is complete, the combined entity is a public trading entity and is governed by a board of directors that often includes SPAC sponsors (or their representatives) and vendors (or their representatives). Funds are refunded if the acquisition is not completed within two years.
The SPAC depends on the legal regulation of each state
Companies planning to raise capital through a SPAC transaction should plan their IPO preparedness in advance to ensure that regulatory requirements are met. This may include examining the financial position and operational control, the integrity and operations of new directors and management, business history, material permits and approvals required for operations and resolving conflicts of interest.
Following the IPO, SPAC significantly increases the requirement for financial reporting, including the submission of periodic reports on the stock exchange. Therefore, private operating companies should design systems and processes to ensure compliance with legal obligations.
Financial reporting in accordance with legal regulations
SPAC transactions can lead to unique financial and accounting problems under International Financial Reporting Standards and US GAAP. Making the necessary changes and proving compliance with standards with regulators is a painstaking process that has several other shortcomings, the first of which is cost. While SPAC provides private companies with a new path to access public markets and benefits from wider access to capital, liquidity and experienced managers, it also includes greater regulatory oversight. These include regular audits and increased financial reporting requirements, assessments of internal controls, and measures to ensure that the organization meets the reporting deadlines of public enterprises.
Businesses should also focus on setting up systems and processes to be prepared and ready to function as a public company. SPACs can be a very effective way to reduce the costs, risks, and deadlines associated with setting up a company in public. The reputation and experience of the sponsors, their share in the capital, the conditions under which they receive it, the target sector and the values of the order - all these are factors that need to be considered before making a final decision. Grant Thornton experts are here to make your journey easier!
Data source: Grant Thornton Global
Grant Thornton SPAC Specialist:
Dino Bendeković
Director Mergers & Acquisitions, Northern Adriatic region
Mobile: +385 (0)91 6053 780
E-mail: dino.bendekovic@hr.gt.com