Merging with a special purpose acquisition company (SPAC) is a quick, easy, and low risk way to turn your great work as a company into untold riches. But unfortunately, before we go on, we must focus your attention on the date of our article – April Fools!!
Now, some elements of the opening sentence are true. Merging with a SPAC is a way to turn your hard work as a company into … something different than what it is today. There is no doubt SPACs are a tool to change the capitalization of a company, and, when done correctly, they can be excellent vehicles for improving an organization. However, when done incorrectly, merging with a SPAC can result in the words “dumpster fire” being used to describe the outcome.
Doing It Right
Yesterday, Paul Munter, Acting Chief Accountant of the Securities and Exchange Commission, issued a public statement outlining several financial reporting and auditing considerations for companies merging with SPACs.
In summary, he points out “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.”
Paul’s statement highlights some of the key considerations:
Market and Timing
Merging with a SPAC can accelerate the time between forming a company and becoming a publicly traded company. In many cases, the company has had little time to develop the robust processes, teams, and technologies necessary to meet the more rigorous and expensive financial reporting, governance, investor relations, and other requirements.
The extent, timing, and cadence of quarterly and annual reporting is often much faster and more detailed than is required by a private company. Also, there are significant judgments required in the financial reporting of the merger of the SPAC with the target company. These challenges can be met by a solid team of qualified financial reporting professionals. Assembling such a team in advance of the merger is an important task.
Section 404(a) of the Sarbanes-Oxley Act requires that management assess its internal controls over financial reporting annually. There are situations that allow this to be excluded, making it critical for the company to understand what rules apply and when. In addition, management must assess its disclosure controls and procedures each quarter. This assessment, while complementary to the requirements of Section 404(a), is distinct from that section and requires additional focus and effort.
Corporate Governance and Audit Committee
The nature of a public company board is much different from that of a private company board. Management has additional responsibilities for interacting with the board. And the board itself is subject to more scrutiny as to its independence, experience, and engagement.
Creating or enhancing an audit committee is another key step. Developing clear and effective communication between the committee, management, and auditors is essential for an appropriate tone at the top related to integrity of the financial reporting process.
The financial statement auditors are required to be registered with the Public Company Accounting Oversight Board and conduct their audit in compliance with the Board’s standards. These standards are different from those required in a private company audit. Further, the auditor may need to change or augment the audit team to ensure members have appropriate experience auditing public companies.
While there is no real quick, easy, and low risk way to turn your company into one producing untold riches, SPACs continue to be a popular vehicle for companies to enter the public markets. And, like every other element of forming and growing a company, they take special effort and focus.
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