Clients intrigued by SPACs? Insights to help you guide them
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Clients intrigued by SPACs? Insights to help you guide them
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Clients intrigued by SPACs? Insights to help you guide them

1 year ago · 5 min read

What do you need to know about SPACs, or special-purpose acquisition companies? These investment vehicles are enjoying a surge in popularity. By early April 2021, SPACs had raised approximately $100 billion since the start of 2021, according to SPACInsider, compared with just over $83 billion in all of 2020. The reasons include a booming stock market that attracts well-funded investors to new deals, the involvement of more experienced deal sponsors and management teams, and a better understanding of the SPAC structure among investors, as well as a crowd of celebrity boosters that has drawn attention to these vehicles.

CPAs should be aware of the many opportunities to provide services or advice related to SPACs, as well as the numerous caveats for companies and investors who may want to jump into them.

Going public on a fast track

A SPAC is a shell company created through an initial public offering (IPO) to finance a merger or acquisition of a private operating company and take it public. Also known as “blank check companies,” they have no operations or purpose other than to raise capital. SPAC governing documents typically give them between 18 to 24 months to identify and merge with a target company or return the capital raised to the investors. When the merger is complete, the target company takes over the shell and becomes publicly listed without undergoing its own IPO. The goal is to avoid some of the complexities and uncertainties of the traditional route to being publicly listed. The potential benefits for a private company include faster access to capital, less regulatory scrutiny and documentation, and less volatility. “SPAC mergers provide more certainty because of upfront pricing and valuation that is in large part determined through negotiations that typically occur months before the transaction closes,” according to Deloitte’s “Private-Company CFO Considerations for SPAC Transactions.”

CPA services in demand

CPAs may be called on to offer a variety of services to SPACs or their target companies. “We are being engaged in all aspects of the deal,” said Maryellen Galuchie, CPA/CEIV/ABV, managing director, corporate value consulting, Grant Thornton LLP, and a member of the AICPA Business Valuations Committee. Her firm has worked with companies in many SPAC transactions in recent months and has created numerous resources on SPACs.

CPAs may become involved because the SPAC itself is required to be audited as part of its formation and the private companies being acquired may need auditors. The private-company targets may need to make changes in their accounting and financial reporting, internal controls and processes, internal audit, and enterprise risk management. “You have to make sure the company is ready to go public,” Galuchie said.

For example, if the target company has used an accounting standard alternative for private companies — such as the delayed effective date for FASB’s recent guidance on leases — its accounting must be brought up to public-company standards. Companies that have been operating as C corporations, partnerships, or another structure may need to consider new tax structures when they go public. It may also be necessary to perform a valuation under Sec. 409A for stock-based compensation, or to tackle information technology, cybersecurity, and a range of other needs to help move a company from private to public in an accelerated time frame. “Many companies may not anticipate all these steps,” Galuchie said.

Risks for target companies

In addition, CPAs can offer advice on some of the risks for the target company because of the many demands of making this change in a short time. The company must meet the compliance requirements for being publicly listed, and it typically must be ready to operate as a public company in as little as three to four months rather than the 18-month period that might be necessary for an IPO.

Paul Munter, the SEC acting chief accountant, recently issued a public statement for private companies seeking to go public through a SPAC. Because of the risks involved, “it is critical that the board of directors, audit committee (as applicable), management, and auditors of these operating companies fully understand and fulfill their respective professional responsibilities so that companies meet their obligations under the federal securities laws and investors are provided with high-quality financial reporting at the time of the merger and on an ongoing basis in subsequent periods,” he said. The statement addressed considerations in areas such as market and timing, financial reporting, internal control, corporate governance and audit committee concerns, and auditor issues. Late last year, the SEC issued disclosure guidance for SPACs.

In addition to SEC scrutiny, companies — and possibly sponsors, directors, and officers — may be subject to investor lawsuits if, for example, the combined company doesn’t meet expectations and investors feel information they received was misleading or false, if the deal is not completed, or if the company ultimately faces bankruptcy.

Risks for investors

For those who invest in SPACs, significant potential hazards could exist, since a SPAC’s ultimate success can be difficult to predict. When his financial planning clients inquire about SPACs, “I explain that they are very risky and the odds are against them for success compared to the market as a whole,” said Michael Goodman, CPA/PFS, president of Wealthstream Advisors Inc. and a member of the AICPA Personal Financial Planning Summit Planning Committee. In terms of risk level, he equates SPACs to venture capital or private-equity investments. “Research shows that on average SPACs do not perform as well as IPOs or small company stocks,” he said.

Many celebrities, such as Jay-Z, Alex Rodriguez, Shaquille O’Neal, Ciara Wilson, and Larry Kudlow, sit on a SPAC board or are otherwise involved with a SPAC. In response to the interest SPACs have generated, the SEC in March issued an investor alert warning against being caught up in the hype. “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss,” the SEC said. The alert, which offers tips for investors, also noted that celebrities and other sponsors usually get a better deal on their equity than do subsequent investors. These sponsors or early investors typically pay a nominal amount and together receive around 20% of company stock value, which dilutes the value of the shares that later SPAC shareholders receive, since they are splitting up only 80% of the total value.

“The most important piece of information might be how the SPAC sponsor is profiting from the deal structure,” Goodman said. Consider how and when the sponsors can cash out and what kinds of warrants are involved. “Some SPACs transfer most of the risk to the investors, and the sponsors can shield themselves from some of the exposure,” he said.

In addition, Galuchie has recently heard about many startups and private companies that have been bombarded with offers from SPACs seeking a target company, in part because of the SPAC’s time limit for making a deal. “There might be some rush to spending so that the money doesn’t have to be returned to the investors,” Galuchie said, which could cloud the sponsors’ judgment in choosing targets.

Goodman noted that some target companies don’t yet have cash flow or profits. “While the upside opportunity could be significant, I would say that you should only invest an amount if you are comfortable losing 100% of it,” he concluded.

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— Anita Dennis is a freelance writer based in New Jersey. To comment on this article or to suggest an idea for another article, contact Ellen Goldstein, director–Communications & Special Projects, at Ellen.Goldstein@aicpa-cima.com.

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