SPACs Need to Focus on Compliance Obligations or Be Prepared to Face Consequences

We’re in the midst of a transformative year for mergers and acquisitions (M&A). After a brief pause in dealmaking when the COVID-19 pandemic took hold in March 2020, dealmaking went remote and the markets have come roaring back to record levels of activity.

With an array of drivers helping the market move forward, well-capitalized special purpose acquisition companies (SPACs) have dominated headlines since the pandemic began for their ability to raise tremendous amounts of cash to quickly take privately held companies public.

While the activity of SPACs represents only a small percentage of transactions, these blank-check companies are making big plays for attractive targets. In the process, SPACs are driving up valuations and giving corporates and private equity firms stiff competition to win deals.

Shortly after the U.S. Securities and Exchange Commission (SEC) offered SPACs basic guidance in the form of a staff statement on the treatment of warrants as liabilities instead of equities — the first comments to come down as watchdogs begin to look at regulating the market — I had the pleasure of moderating “SPACs: An M&A Overview, Trends and Beating the Competition,” a webinar hosted by Divestopedia. I was joined by a knowledgeable group of industry veterans: Nina Kelleher, director at EisnerAmper; Andrew Sherman, a partner at Seyfarth Shaw, and Justin Burchett, managing director at Stout.

In a lively discussion, we dug deep and discussed how the SPACs market has sobered up a lot in the U.S., with the rest of the world likely to follow suit. However, for those already on the SPACs-to-IPO path, a focal point of the webinar is the critical role compliance plays in the process.

Since SPACs are formed as shell companies with light management structures, they don’t necessarily have the most robust controls to comply with the requirements of being a publicly traded company. They have small teams — generally less than ten people — and heavy compliance requirements can be burdensome. Adding another layer of pressure is that there’s a limited window for a SPAC to take a company public.

With the SEC signaling more scrutiny on the horizon, the panelists stressed the importance of creating an airtight compliance program. Putting the proper experts, controls and technology in place to adhere to reporting requirements — such as making SEC filings and reporting to shareholders from day one — is the way to avoid risk and ensure a positive outcome.

My special thanks to the panelists for their insights. You can watch the webinar in its entirety here.