By Meredith Thornton, CPA

Special purpose acquisition companies (SPACs) are not new in the world of investing, but there has been a recent surge in their popularity. CPAs, as trusted advisers, may encounter SPACs or receive questions about them from clients, so it is important to understand the basics of these investment vehicles.

A SPAC is defined by the Securities and Exchange Commission (SEC) as a shell company formed for the sole purpose of raising money through an initial public offering (IPO) and then uses the capital raised to merge with an existing private company.¹ SPACs are often referred to as “blank check” companies because they have no real business operations; they exist only to engage in a merger or acquisition. The sponsors or founders of a SPAC, which are typically owned by a private equity fund or an independent management team, are generally responsible for fundraising and identifying a privately owned target company within the market. The management team may include individuals who have experience within a specific industry or experience with managing public companies.²

The process of becoming a publicly traded company is typically more efficient for a SPAC than for a private operating company because SPACs are shell companies with no historical financials and no actual business operations. The actual IPO process, however, is no different in terms of the SEC filing requirements. SPACs raise money through an IPO by offering units (typically priced at $10 per unit) to public investors. The units consist of both shares of the SPAC and warrants. Warrants entitle a holder to purchase a fractional share of the company at a specific price. Warrants are exercisable 30 days after the combination with the target company or 12 months after the IPO, whichever occurs later.

The business combination of the SPAC and a targeted private company is referred to as the “de-SPAC” transaction. The proceeds of the IPO are held in a trust, typically in U.S. government-backed securities, and generally will be used to fund the de-SPAC transaction. The SPAC will typically have a life of 18 to 24 months to identify and close on a target, otherwise the funds will be returned to investors and the SPAC will be terminated. This window of time can be extended with shareholder approval.

SPACs cannot identify a target prior to the IPO to maintain the relative simplicity a SPAC enjoys in completing the IPO process. Once a target is identified, SPAC shareholders can maintain their investment and become owners of the newly combined company or can redeem their investment and receive their pro rata share of the trust account. The SPAC will be required to file a proxy statement (Form S-4) with the SEC. The form must be filed by public companies to register securities issued as part of a transaction. The Form S-4 may require the target company to provide two to three years of audited financial statements to give potential investors insight into the background and historical profitability of the company. Once the de-SPAC transaction is complete, the newly formed company will have four business days to file a Form 8-K, which requires three years of audited financial statements among other required elements of financial and nonfinancial information.

SPACs typically offer an easier path to going public than a traditional private company due to the SPAC’s lack of historical financials and business operations. However, the financial reporting burden and due diligence required when a publicly traded SPAC combines with a private company is similar to the reporting requirements involved in the traditional IPO process, and these rigorous requirements may be a challenge for private companies. Proponents of SPACs believe the SPAC IPO process offers private companies more certainty as to a company’s valuation, more control over deal terms, and a good alternative for private companies looking to go public during periods of market volatility.³ The popularity of SPACs has caught the eye of regulators, and in recent months the SPAC boom has started to cool as the SEC has issued new guidance on accounting for certain SPAC shares and warrants.⁴ It is not yet clear if the market’s attraction for SPACs will continue to grow or if regulation will temper their popularity.

¹ SPACs, Securities and Exchange Commission Office of Investor Education and Advocacy, Investor.gov.
² “Special Purpose Acquisition Companies: An Introduction,” The Harvard Law School Forum on Corporate Governance (2018).
³ Richard Harroch, Hari Raman, and Albert Vanderlaan, “10 Key Questions and Answers about SPACs,” Forbes Magazine (Nov. 11, 2020).
⁴ Anirban Sen and Chris Prentice, and Krystal Hu, Reuters (2021) “U.S. SEC Cracks Down a Second Time on SPAC Equity Accounting Treatment - Sources,” Reuters (Sept. 28, 2021).

Meredith Thornton, CPA, is a manager with Global Tax Management in Wayne. She can be reached at mthornton@gtmtax.com.

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