SPACs are the current tulips of the markets. Everyone wants a piece of one. Celebrities are joining the rush. As noted in the title, Shaq has one. Actually Shaq is on his second SPAC.
Almost 250 SPAC IPOs were completed in 2020, raising total gross proceeds of approximately $75 billion That was about half of the number of IPOs and half of the capital raised in IPOs.
There are lots or reasons for companies to become liquid and raise capital through a SPAC. There is certainty in pricing. Private company founders and their backers don’t have to spend months worried about how much capital will be raised in an IPO. They negotiate the capital raise with the SPAC executives.
The downside is that the private company may not have been through the compliance wringer to make sure it’s ready for the rigors of being a public company.
The SEC is catching up and has released a series of statements and policy notices about SPACs. The Division of Corporate Finance pointed out that these newly crafted public companies have to focus on their books and records and their financial controls. The public SPACs have to meet these standards. But since they are just sitting on a pile of cash, their controls can be very simple. It’s really the controls of the acquired company that will be in operation.
A public statement by the SEC’s Chief Accountant also pointed to the financial controls, governance, and audit controls that creates faith in the public markets.
One item that the SEC has started to focus on is the treatment of the warrants involved in the SPAC combination. The reason that sponsors are jumping on the SPAC bandwagon is the promote granted to the SPAC organizers in the form of warrants.
The Securities and Exchange Commission last week began privately telling accountants that warrants, which are issued to early investors in the deals, might not be considered equity instruments, according to people familiar with the matter.
It’s the special sauce that has helped lubricate the SPAC engine. It’s not a bubble in valuation. It’s a bubble in method.
Sources:
- Corp Fin’s “SPAC” Statement: All That Glitters Is Not Gold
- Financial Reporting and Auditing Considerations of Companies Merging with SPACs
- Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies
- SPACs Draw Internal Control, Governance Concerns
- Shaq SPAC 2.0 Coming With 3 Former Disney Executives: What Investors Should Know
- SPAC Boom Faces Latest Threat From SEC in Accounting Discussions