What is a Special Purpose Acquisition Company (SPAC) and How Does it Impact Your Equity Plan?

Over the last two years, SPACs (Special Purpose Acquisition Companies) have become an increasingly popular investment vehicle for taking a private company public. In 2020, there were 248 SPAC IPOs (more than the prior ten years combined) and as of September 2021 that number has nearly doubled.¹

For private company leaders considering going public via SPAC, there are considerations to think through – including complexities that may directly impact your company’s equity plan. In this article we will walk through some of those considerations to help you and your equity plan administrators prepare.

What is a SPAC?

A SPAC is a shell company, with no commercial operations of its own, built specifically to raise capital and merge with another company in line with its investment objectives. Once a SPAC goes public, it will have a set timeframe (usually 2 years or less) by which it must acquire a company, or else liquidate and return the money to investors. By merging with a SPAC (a process called “de-SPACing”), a private company circumvents the traditional IPO process and enter the public markets.

SPACs are formed by a sponsor or team of sponsors (often private equity firms, hedge funds or successful entrepreneurs), who are responsible for raising additional capital from investors (if needed), finding the target acquisition company, and negotiating the terms of the merger. In exchange, SPAC sponsors can receive a significant stake in the acquisition company (sometimes 20% of more).

Are SPACS an IPO Alternative?

IPOs and SPACs achieve the same goal: turning a private company into a public company. IPOs generally take a significant amount of time, meeting listing requirements, compliance standards, gathering audited financials, price negotiation and investor relations. An IPO can sometimes take 1-2 years.

Going public through a SPACs, on the other hand, follows a different process. Because they have no operating history of audited financials to disclose, SPACs can theoretically go public in a shorter amount of time. Unlike a traditional IPO, the SPAC’s IPO valuation and listing price are set directly by negotiations with the SPAC sponsors. As a merger instead of a public listing, a SPAC may expedite the target company’s entrance into the public market.

There are many considerations that go into pursuing a SPAC, to name a few:

1. Financial and Governance Requirements of a SPAC Merger

Consult with your legal team to learn more about the legal requirements for a SPAC merger in comparison with an IPO. Generally, a target company will still need to produce audited financials from the prior two years and up to 3 years of compliance data associated with GAAP and SEC rules and PCAOB audit standards. Companies may include forward-looking financial projections (which are not allowed for companies undergoing a traditional IPO), in order to shore up interest from investors.

2. Public Market Compliance and Reporting Requirements

An IPO may serve as a staging event to prepare a private company for the compliance and reporting requirements that accompany a public designation. Therefore, circumventing that process via a SPAC IPO may leave a company underprepared when that moment arrives post-merger.

3. Major Changes to Your Equity Plan and Strategy

Going public via SPAC may change a company’s equity plan. Not only is the company gaining a major shareholder on their cap table (i.e., the sponsor SPAC), but it may affect the size of the share pool for future equity awards. Companies pursuing a SPAC may find it wise to revaluate their equity governance policy including:

• The treatment of outstanding equity rewards,
• Key provisions of a merged entity equity incentive plan,
• Key provisions of merged entity employee stock purchase plan (ESPP),
• Pay competitiveness and the retention of key personnel, and
• Severance policies and obligations.

4. Lockup Periods and Other Nuances

A SPAC merger may give companies the freedom to negotiate provisions like lockup periods, depending on the needs of the SPAC sponsors and company shareholders. It is important for administrators to carefully monitor their cap tables on divergent equity release dates.

Another thing to keep in mind: 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.

How Morgan Stanley at Work can Help Set you up for SPAC IPO Success

 The Shareworks Platform can help companies considering, or already in the process of, a SPAC IPO in several ways:

• Managing your cap table on the Shareworks platform makes it easy to transition equity management as you prepare to go public. Equity plan administrators have a single source of truth, including detailed share counts and equity structures that are audit-ready. And for shareholders and other participants, the experience remains the same even after the merger.
• Robust functionality allows you to generate auditable financial reporting disclosures needed during the merger process, as well as an easy-to-understand capitalization table and proxy disclosure reporting for tracking your insiders’ securities.
• If you decide to eliminate lockup periods or design a more custom equity release schedule, you can configure the platform to automatically distribute equity accordingly.
• Global Intelligence helps ensure you are staying compliant with geo-specific legal and tax regulations, through an easy-to-use online database that applies to equity plans in over 170 countries.

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