A guide to De-SPAC transactions and how the process works

11 minute read
What is a De-SPAC transaction?


While both a traditional IPO and a SPAC IPO (with a De-SPAC transaction) are vehicles to bring a company public, the processes are different. In a traditional IPO, the private company searches for investors. In the SPAC IPO model, the investors are searching for the company — literally turning the equation on its head.

What is a De-SPAC transaction?

A De-SPAC transaction is actually a reverse merger involving a Special Purchase Acquisition Company (SPAC). The SPAC was initially formed as an IPO to generate capital to purchase a private business and bring them public. Like any other publicly listed company, the SPAC must obtain shareholder approval of any intended purchase/merger.

What is the De-SPAC process?

A De-SPAC is essentially the conclusion of the SPAC lifecycle. Again, the entire purpose of a Special Purchase Acquisition Company is to acquire a private company and take it public through the De-SPAC process. At the very highest level, the De-SPAC process includes negotiating the terms of the acquisition with the target private company, gaining SPAC shareholder approval and executing the transaction through SEC filings and approvals. Although that’s the 10,000-foot view, we can dive down deeper and take a closer look at the key steps in the De-SPAC process:

1. Identifying a target: After the SPAC is formed and launched through an IPO, the SPAC begins the acquisition identification phase. Some SPACs are formed with a target company already in mind while others are focused on finding companies in specific industries or areas – such as clean energy or pharmaceuticals — as potential targets. SPACs typically have 18-24 months from IPO formation to complete a De-SPAC transaction or the SPAC must either return the funds to investors or request an extension from its shareholders.

2. Due diligence: Once the SPAC has identified the target, the De-SPAC process officially begins with a formal letter of intent for the merger. This starts the due diligence phase, in which the SPAC examines the business operations of the target company. This follows the standards and best practices of due diligence in traditional M&A transactions — including a close examination of tax and accounting documentation and practices and a third-party business valuation.

3. Negotiating terms: After obtaining a thorough understanding of the business from the due diligence investigations, the SPAC and the target company will negotiate the terms of their merger agreement. This includes how the De-SPAC transaction will be structured, as well as establishing a governance structure for the future-public company. As part of this, additional financing is often secured by the SPAC to protect the deal against the risk of shareholder redemptions of common stock. These financing tools can include:

  • Private investment
  • Private Investment in Public Equity (PIPE) deals, in which affiliates of the SPAC and/or institutional investors commit to purchase common stock at a set price
  • An additional public offering of common stock
  • Preferred equity investments
  • Debt financing (e.g., registered notes, private placement, term loans, revolving credit facilities)

4. Merger filings: Once the merger agreement is signed, the next step is to file an S-4 Prospectus or Special Merger Proxy (PREM and DEFM).

Filings include a whole host of required information such as:

  • Management Discussion and Analysis (MD&A) around the SPAC and targeted company for acquisition. The MD&A is the company management’s perspective on past performance, current financial condition and future projections.
  • Historical financial statements and information on the SPAC and targeted company
  • Detailed cost-per-share information
  • Pro forma financial statements showing the anticipated effect of the “merger”
  • Outline of how the post-transaction public company will be structured
  • Executive compensation
  • Board of Director composition
  • All relevant financing (i.e., PIPE) or debt financing agreements related to De- SPAC transaction

5. SEC review, comment and amendments: Once all merger-related documents have been filed, the SEC conducts an initial review of the documentation. The SEC will provide notice within 10 days of filing if they intend to conduct an in-depth review — which can take up to 30 days from the filing date for the SEC to provide comments to the SPAC and target company. The parties then must amend their filings to address all SEC comments and/or work with the SEC to resolve any issues. This point is often where the De-SPAC can often slow down — where a targeted timeline can stretch out to months. Therefore, it’s critically important that both parties engage experienced financial reporting partners to ensure their filings are thorough and accurate in order to mitigate SEC delays in the review phase.

6. Shareholder vote: All proposed De-SPAC transactions require SPAC shareholder approval. Thus, once the SEC review is complete and all comments have been addressed, the proxy statement is mailed to the SPAC’s shareholders. In the weeks leading up to the vote — as shareholders review the proxy statement — the SPAC will often conduct a roadshow, similar to that of a traditional IPO, to generate interest among potential investors. A successful roadshow can also help build support for the deal among existing SPAC shareholders. Before the shareholder vote, the SPAC will tally redemption requests — that is, shareholders who wish to redeem their stock and will not participate in the official approval vote. Then, the SPAC holds a shareholder meeting (virtually, in-person or hybrid), takes the vote and announces the result.

7. The “Super 8-K” and other financial reporting requirements: If the shareholders vote to approve the De-SPAC transaction, SEC rules require the SPAC to file a special Form 8-K within four business days of the completion of the De- SPAC transaction — typically defined as from the date of the shareholder approval vote.

In addition, the newly public company must fulfill several other financial reporting requirements, including:

  • Meeting periodic reporting requirements on Forms 10-Q and 10-K
  • Registering Form S-1 Resale Registration for the new company
  • Establishing Investor Relations for the new company
  • Implementing an Internal Controls over Financial Reporting (ICFR) monitoring structure to ensure ICFR effectiveness
  • Registering a new equity plan through Form S-8

Why do companies decide to go public via a De-SPAC transaction?

The De-SPAC process offers advantages to both the SPAC and the target company, including:

  • Speed to capture market opportunity: As mentioned, the De-SPAC process provides a route to take a company public on a timeline of months, instead of years. This allows companies to more readily capture the market opportunity offered by a relative moment in time — with less exposure to market volatility.
  • Certainty in valuation: Because the SPAC and the target company agree on the terms of the transaction and the price, both sides have greater control and certainty in the valuation of the deal. Comparatively, a traditional IPO exposes the target company — and initial investors — to market volatility and other factors, such as a poor roadshow, which can impact the value of a deal.
  • PIPE investment to drive post-transaction success: The De-SPAC process also allows the SPAC the ability to raise additional capital through Private Investment in Public Equity (PIPE). This additional capital can fund a portion of the target’s acquisition price, ultimately providing the target company with a strong infusion of post-transaction operating cash.

Key considerations for De-SPAC success

As with any capital market transaction, a De-SPAC transaction requires a broad and deep team of experienced advisors to help guide the complex deal to a successful and optimal close — particularly given the typically accelerated De-SPAC timeline. In particular, the interdisciplinary De-SPAC team should focus on the following common sticking points and barriers to De-SPAC success:

Thorough pre-close diligence

Just as with traditional M&A transactions, the due diligence process is where many De-SPAC transactions fall apart. The most common problem is that the private target company is not adequately prepared for the rigors of SEC regulations for public companies. From the SPAC’s perspective, this is giving rise to the notion of a minimum readiness standard that a target company must meet in order to proceed with negotiations.

With the boom in SPAC formations, private companies are increasingly beginning the proactive process of preparing for a De-SPAC “merger.” This readiness should include a comprehensive look at the entire business operations, including accounting and financial reporting, finance effectiveness, financial planning and analysis, tax matters, internal controls and internal audit, human resources (HR) and compensation, treasury, enterprise risk management, technology and cybersecurity.

SEC compliance for financial reporting

While the SPAC/De-SPAC process has grown in popularity specifically because it provides an accelerated route that can include less regulatory scrutiny of the private target company, the SPAC boom has the SEC looking more closely at additional requirements and restrictions. Private companies should assume that they need to adhere to the exact SEC requirements and relevant stock exchange rules as they would if undertaking a traditional IPO process. This is particularly true for financial reporting: Private companies must ensure that their financial statements are fully ready for the intense scrutiny of the public market before beginning the De- SPAC process. 

Securing shareholder support and supplemental PIPE investment

SPACs cannot assume approval for a De-SPAC transaction even with a low shareholder approval requirement. These deals may appear less complex than either an M&A or traditional IPO, but they are complex capital markets transactions. In addition, with the rise in Environmental, Social and Governance (ESG) investing, these less materially obvious qualities have increasingly presented sticking points in gaining shareholder approval.

In addition, even if the shareholder vote passes the necessary threshold to proceed, dissenting SPAC shareholders can exercise their right to redeem shares. This can create late-stage uncertainty around financing the deal and funding post-close operations. For this reason, De- SPAC transactions increasingly include minimum-cash closing conditions and may often include supplemental PIPE investments.

Managing financial reporting requirements under accelerated timelines

The filing (S-1 IPO, S-4/F-4, Tender Offer, Proxy) and the prep for the ongoing reporting Edgar HTML and iXBRL tagging that come as part of accessing capital markets.

Private companies eyeing De-SPAC opportunities should begin proactively preparing their financial statements for these public reporting requirements. In particular, the target company should focus on the following financial reporting requirements:

  • Providing up to three years of annual historical financial statements in compliance with public company Generally Accepted Accounting Principles (GAAP) and SEC rules and audited under Public Company Accounting Oversight Board (PCAOB) standards.
  • Providing interim financial statements, pro forma financial information, management discussion and analysis (MD&A), and market-risk disclosures.
  • Other nonfinancial information for a Form S-4 or proxy statement and a special Form 8-K (“Super 8-K”).

As part of this readiness, the target company should engage experienced financial reporting and financial printing partners that can help them unravel the complexities around the following questions:

  • Determining the historical period for including financial statements in the proxy statement or Form S-4 (and considering staleness dates).
  • Effectively applying Generally Accepted Accounting Principles (GAAP) and public company adoption dates for new standards to reflect the impact on the New Company’s financial statements and required SEC filings.
  • Understanding the impact of historical acquisitions and dispositions — and any necessary financial reporting requirements.
  • Navigating and responding to SEC comments.

Operating as a public company

As soon as the De-SPAC transaction closes, the new company must actively operate as a public company which includes being ready to meet all its public company reporting requirements.

To evaluate public company readiness, a target company should examine its capabilities around the following:

  • Forecasting: Ensuring accurate and transparent forecasts are created and communicated to Investors and Analysts.
  • Financial reporting: Engaging financial reporting expertise and support with direct experience in SEC reporting requirements of a public company.
  • Internal controls: Re-evaluating internal controls over financial reporting to ensure the integrity and reliability of financial statements.
  • Tax planning: Adjusting tax planning and strategy to optimize cash management and budgeting.
  • Governance: Company leadership (board of directors and related committees) must meet governance requirements of the relevant stock exchange(s) — typically including independent directors, an independent audit committee, and an independent compensation committee, among other things.
  • IT infrastructure and security: Operating as a public company requires a properly functioning Enterprise Resource Planning (ERP) suite to orchestrate all business objectives. Leadership should also reinforce focus and investment in cybersecurity to protect sensitive infromation as the company moves into the public market.

Engaging experienced partners to guide preparedness and De-SPAC success

As many SPACs search for private companies to take public, both parties must be prepared for the road ahead and the stringent SEC requirements for publicly listed companies. De-SPAC preparation should begin well before initial engagements for private companies to go public via a SPAC. De-SPAC timelines are always condensed, so proactively building a team of experienced partners is critical. Early building of this cross-functional team of expert partners will position a company for SPAC acquisition and provide the expertise necessary to meet the broad and complex financial reporting requirements of a public company.

Learn more about Toppan Merrill’s deep experience and technical support that can help drive successful preparation, execution and post-De-SPAC transaction success here  — or connect to one of our experts at [email protected] or by calling 800.688.4400.

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