On March 31, 2021, in light of the increasing number of private operating companies seeking to go public in the United States through a merger with a special purpose acquisition company (SPAC), referred to as a deSPAC transaction, the Staff of the SEC’s Division of Corporation Finance and the SEC’s Office of the Chief Accountant released separate public statements highlighting several unique risks and accounting, financial reporting and governance challenges facing private operating companies effecting deSPAC transactions. These statements complement Staff guidance released in late 2020 that discussed disclosure considerations in the context of deSPAC transactions. The new SEC statements generally stressed two themes:
- Operating companies that go public via a deSPAC transaction will be subject to shell company restrictions that do not apply to operating companies that go public through a traditional IPO.
- Advance planning is essential in order for private operating companies to be prepared to fully comply with their obligations under the federal securities laws and relevant stock exchange listing standards on Day 1 after the closing of a deSPAC transaction.
Taken together, the SEC’s increased focus on SPACs and deSPAC transactions serves as a reminder that the public company preparedness work typically associated with an IPO is at least equally as important in the deSPAC context, notwithstanding the potentially compressed deSPAC transaction timeline.
Post-deSPAC Restrictions Due to SPAC Shell Company Status
Going public by way of deSPAC transaction imposes several restrictions on the combined public company’s ability to register securities and access the U.S. public capital markets that would not apply if the operating company had gone public through a traditional IPO. These restrictions are attributable to the SPAC’s pre-merger status as a shell company under the federal securities laws.
The most significant restrictions arise as a result of the combined company being considered an “ineligible issuer” for three years following completion of the deSPAC transaction. As an “ineligible issuer,” the combined company cannot:
- Qualify as a Well-Known Seasoned Issuer (“WKSI”): This applies even if the combined company’s public float would otherwise qualify it as a WKSI. Resulting limitations include the inability to sell securities pursuant to automatically effective shelf registration statements.
- Use Free Writing Prospectuses: This common tool for conveying material updates to investors during the marketing of a public offering is prohibited and, as a result, companies also are prohibited from using:
- Electronic Roadshows. The fact that roadshow presentations can only be conducted live presents a significant challenge to the marketing of public offerings, as recorded roadshow presentations would be prohibited.
- Term Sheet Free Writing Prospectuses. These are commonly used in public offerings of debt securities.
In addition, the public company resulting from the deSPAC transaction will not be able to:
- incorporate Exchange Act reports by reference on Form S-1 registration statements for three years following the closing of the deSPAC transaction;
- file Form S-8 registration statements to register compensatory securities offerings until at least 60 calendar days after Form 10 information regarding the combined company has been filed with the SEC (this is usually done at or near the closing of the deSPAC transaction through a “Super 8-K”); or
- utilize the 71-day extension to file financial statements of the private operating company, which must be filed within four business days of the closing of the deSPAC transaction.
Public Company Readiness is Essential
The statements from the Staff of the Division of Corporation Finance and the Office of the Chief Accountant stress that, immediately upon closing of a deSPAC transaction, the newly public operating company will need to have in place the board and management expertise, books and records, internal controls and other governance structures required to comply with federal securities laws and applicable stock exchange listing standards. Transition period accommodations afforded to newly public companies that go public through an IPO (for example, related to internal control over financial reporting) generally do not apply to companies that go public through a deSPAC transaction.
Perhaps reacting to the speed with which some recent deSPAC transactions have been announced, both the Staff of the Division of Corporation Finance and the Office of the Chief Accountant highlight the need for significant advance planning and commitment of resources by a private operating company to be ready to fully satisfy the requirements of public company life upon completion of the deSPAC transaction. Key areas of focus include:
- Corporate Governance: A private operating company that goes public via a deSPAC transaction must satisfy stock exchange corporate governance requirements upon closing of the deSPAC transaction. These include having a majority of independent directors, an independent audit committee consisting of directors with specialized experience, and independent director oversight of executive compensation and the director nomination process. Advance planning and sufficient time are necessary in order to identify, elect, and on-board a newly constituted independent board and board committees, and for the board and its committees to be prepared to adequately carry out their responsibilities under the federal securities laws and stock exchange listing standards. Failure to satisfy a listing standard, or receipt of notice of non-compliance from a national securities exchange on which the public company’s securities are listed, will require public disclosure and could eventually lead to delisting.
- Financial Reporting, Internal Controls and Disclosure Controls: The public company resulting from a deSPAC transaction needs to have finance and accounting professionals with sufficient knowledge of relevant public company reporting requirements and complex accounting considerations (including accounting for and reporting the deSPAC transaction itself). The company also needs to have sufficient processes and staffing to meet deadlines for current and periodic reporting, including implementing (immediately upon closing of the deSPAC transaction) and maintaining effective internal control over financial reporting and disclosure controls and procedures.
- Auditor Considerations: Auditors of private operating companies seeking to go public through a deSPAC transaction should assess independence, PCAOB registration and other audit-related requirements early in the deSPAC transaction process, particularly in light of the more condensed timeline than typically is the case with a traditional IPO.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice and of our SPAC practice.
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