Companies acquired by a special purpose acquisition company (SPAC) can expect to face an accelerated timeframe for going public, requiring them to ramp up reporting capabilities and internal controls quickly or risk compliance problems, the Securities and Exchange Commission’s chief accountant said last week in a rare public statement.
“A private company may spend years preparing to transition to a public company in a traditional IPO,” SEC Acting Chief Accountant Paul Munter said March 31.
That kind of time is a luxury SPAC targets typically don’t have, Munter said. Instead, they often only have a few months from the time they meet with the SPAC to when they go public. That means the capabilities most companies spend years building, including enterprise-wide systems to meet regulatory requirements and a public-facing communications function, must be built in weeks.
“It is essential for the … company to have a capable, experienced management team that … can effectively execute the company’s comprehensive plan on an accelerated basis,” he said.
Munter released his statement, along with a staff statement on regulatory matters, as part of the SEC’s effort to get in front of the SPAC boom. In just the first quarter of this year, more SPACs have launched than all of last year — itself a banner year for these types of deals, according to SPACInsider.
“SPACs have been used for decades as a vehicle for private companies to enter the public markets, but have recently become increasingly popular,” Munter said.
Allison Herren Lee, the SEC’s acting chair, raised SPAC concerns as a commissioner last year as part of a broader critique of the Trump administration’s deregulatory push.
"In the short term, a SPAC investment acts largely as a blank check, so it is critical that [there’s an understanding of] the material risks involved," she said at the Practicing Law Institute's SEC Speaks.
Areas of concern
The time crunch is at the center of the challenges companies face because they confront so many regulatory requirements so quickly. Reporting standards, internal controls, board governance and audit procedures are all subject to scrutiny, and private companies are unlikely to have the expertise to manage them absent sufficient time to prepare staff and hire specialists.
“People, processes, and technology … will need to be in place,” he said.
The appropriate accounting standard is an example. Most companies would likely follow GAAP, but companies that are eligible to report on forms applicable to foreign private issuers might have to adapt to International Financial Reporting Standards (IFRS), he said.
Designating the acquirer for accounting purposes isn’t always clear, either. It’s not necessarily the SPAC. A number of considerations, including whether the transaction is structured as a business combination or reverse recapitalization, can impact the designation.
Timing of the company’s initial disclosure under the Sarbanes-Oxley Act is another issue. SOX, enacted in 2002 to curb accounting manipulation, requires public companies to maintain robust internal controls and for management to ensure those controls are reviewed annually. Given SPACs' short lead time, submitting that first evaluation without a good plan can be challenging.
Other challenges for unprepared companies include audit procedures and ensuring auditor independence.
Munter points to dozens of issues, covering reporting, controls, and governance, that could be troublesome for companies scrambling to go from private to public in just months.
“Stakeholders [should] consider the risks, complexities, and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company,” Munter said.