One of the most popular trending topics in capital markets has been the rise of special purpose acquisition company (SPAC) initial public offerings (IPOs). Though SPACs have existed for decades, in 2020 they overtook traditional IPOs as the predominant route for private companies to go public — with a 320% increase in SPAC IPOs between 2019 and 2020.
In contrast to traditional pre-IPO companies, which typically have a year or more to ready their business for becoming public, SPAC targets find themselves on an accelerated schedule to address competing priorities, including compliance with regulatory requirements such as Sarbanes-Oxley (SOX). Read on to learn how SPAC target companies can set themselves up for success in achieving SOX compliance — and download your copy of the full AuditBoard & Deloitte joint guide, SOX Readiness for SPACs: 6 Leading Practices.
Companies that go public through a SPAC merger are required to meet the same regulatory requirements as pre-IPO companies, but in a much shorter time frame. One of the key requirements for public companies — in terms of resources, time-intensiveness, and overall costliness — is Sarbanes-Oxley compliance.
Under the SOX Act of 2002, public companies are required to document, test, and certify their internal controls over financial reporting. The purpose of SOX compliance is to protect shareholders’ interests and prevent corporate accounting fraud by holding public company executives accountable for their financial statements. Non-compliance with SOX may have detrimental consequences for public companies, including fines, prison time for CFOs and CEOs, removal from listing on public stock exchanges, and more.
While pre-IPO companies typically begin their SOX readiness activities up to a year before going public, the time it takes for a SPAC to take a target company public — i.e., complete and finalize its merger and acquisition process — may take between three and four months. Though some de-SPACed companies are not required to be SOX 404a (management certification of controls) and 404b (internal control over financial reporting) compliant until their second year of being public, preparing for a SOX audit is generally not feasible in a matter of weeks or even months. SOX readiness and SOX testing requires significant time and effort, including remediation of identified gaps and re-testing to ensure the remediated controls are working properly.
A May 2021 AuditBoard poll asked over 1,000 audit, risk, and compliance professionals what they foresee as the most challenging steps in preparing for SOX compliance. Nearly 54% of respondents stated that deciding how to model their program, selecting a technology solution, and working with external auditors were nearly equally challenging aspects of SOX readiness.
Source: AuditBoard Poll, May 2021.
As such, an overall recognized leading practice for SPACs is to begin SOX readiness activities as early as possible, rather than waiting until after the acquisition is complete. This urgency is tied to the negative consequences of non-compliance, which may severely impact business growth and investor confidence. SPAC stakeholders — from the sponsor to its target company to its investors — ultimately benefit from investing in SOX readiness early on.
A SPAC merger offers an alternative vehicle to target companies who may not have wanted to go public with a traditional IPO for a variety of reasons. My advice for target company executives would be to think and plan ahead for the public company filing and other requirements from talent, technology, and process point of view - Ashok Parmar, Partner, Deloitte & Touche LLP.
Download the full AuditBoard & Deloitte joint guide, SOX Readiness for SPACs: 6 Leading Practices, to learn recognized practices for SPAC targets to prepare for SOX ahead of a SPAC merger.