Special Purpose Acquisition Company (SPAC)
In the past few years, the use of Special Purpose Acquisition Companies (SPACs) has increased. At a high level, a SPAC is a “blank check” company with no operations of its own. Its sole purpose is to use the money it raises through an initial public offering (IPO) to buy another business in line with its investment objectives.
While some SPACs seek out acquisitions in a specific industry, and others can buy whatever company they choose, but virtually every SPAC deal involves the purchase of a private company. In practice, this allows private companies to go public by merging with a SPAC rather than engaging in the process of a traditional IPO.
The SPAC process includes a number of complexities – including several related to your equity plans. Here are some things to keep in mind.
The SPAC calendar may take more time than you think
One of the potential benefits of a SPAC is the ability to go public faster than an operating company. With no financial history, a SPAC’s IPO registration statements can be simple, which may accelerate the IPO process.
However, things can get more complicated from there. After a SPAC goes public, it’s expected to hold the IPO proceeds in trust until it’s ready to use those funds to acquire another company. If that business combination doesn’t take place within a specified period of time – usually two years – the SPAC is expected to return the proceeds to the original investors.
Presuming the SPAC identifies an acquisition target, the merger itself doesn’t require the same level of paperwork as a new filing with the Securities and Exchange Commission (SEC). That said, private companies that merge with a SPAC must still issue audited financial statements, meet stringent governance requirements and make a range of business disclosures. All of this takes time and could result in a longer-than-anticipated going public experience.
Once the official merger is complete, the combined entity can change its ticker symbol on the stock exchange to reflect its new status.
Different rules apply to SPACs
While private companies that merge with a SPAC ultimately end up as public entities, the path to getting there is a bit different than with a traditional IPO.
For instance, in preparing for an IPO, many companies find themselves in intense price negotiations with numerous investors as part of a roadshow. With a SPAC, however, the company’s valuation is set in direct negotiation with the SPAC sponsors. As a result, deals can often be negotiated in weeks instead of months.
Additionally, depending on the provisions of the underwriting agreement, shares of a SPAC could become immediately tradeable, without a lockup period. However, this isn’t a feature of every SPAC transaction. In fact, in some cases, lockups extend far beyond the usual 180 day period, and shares may also be released on a staggered basis to accommodate the differential needs of the original SPAC sponsors and the target company’s shareholders. This means equity administrators will need a way to keep track of divergent release dates.
Speaking of equity administration, there’s another issue to keep in mind. Not surprisingly, the laws and tax rules that apply to equity plans differ by jurisdiction. If a SPAC acquires a company with employees in different countries, it may face a range of new compliance obligations.
Set up for success
Whether you’re a SPAC engaging in an acquisition or a private company looking to merge with a SPAC, laying the proper groundwork in advance can help set you up for long-term success. Shareworks can help in a number of ways:
- Private companies can easily transition their equity management to the Shareworks public company platform, so employees continue to enjoy a familiar experience.
- Robust functionality allows you to generate auditable financial reporting disclosures, an easy to understand cap table and proxy disclosure reporting for tracking your insiders’ securities.
- You can configure the system to automatically handle blackout periods and scheduled release events.
- Shareworks Global Intelligence puts a world of information at your fingertips, with an easy-to-use online database of the legal and tax regulations that apply to equity plans in over 170 countries.
We’re here to answer your questions! To learn more, get in touch.