The hottest trend in the investment world has been the increase in Special Purpose Acquisition Companies or SPACs. In 2020 there was a 320% increase in SPACs (248 SPACs compared to 59 in 2019), and 2021 set a new record in Q1 alone. SPACs are not new — in fact, they have been around for nearly 30 years.
Up until recently, SPACs (also called blank check companies) were not viewed as an ideal way for a company to go public. However, companies have seen the SPAC route as a cheaper, simplified process to go public compared to the traditional IPO route. With the exponential rise in SPACs, it’s important for companies to consider the implications for SOX and for SOX readiness in the SPAC age. In this article, we will provide a SPAC definition, describe how these are different from a typical IPO, and untangle what is SPAC SOX compliance.
Data collected from www.spacanalytics.com in April 2021
What Is a SPAC?
A SPAC is a company created with the intent to purchase another company. SPACs are generally companies started by high-power, big-name institutional investors (SPAC sponsors) who form a public company (essentially a shell company) through an IPO to raise money. The money SPAC sponsors raised in the IPO is used to purchase a private company (or acquisition target company) that has a good idea or a product in the early stages. With that purchase, the private company is fast tracked to becoming a public company.
How Is a SPAC Different from an IPO?
One managing director for an investment firm described an IPO as “a company looking for money, while a SPAC is money looking for a company.” At the beginning of the SPAC, the blank check company does not have any revenue of their own. The only asset comes from the IPO at the SPAC formation. In fact, the acquired private company may not have any revenue either, just an excellent idea.
Time to market is also much quicker for a SPAC than an IPO. SPACs can happen quickly — sometimes in just two or three months, while an IPO can take anywhere from nine months to a year. Another difference is for the investor’s lock-up period, which is how long the investor has to hold the stock without selling. Traditional IPO investors have to hold their investment for 90-180 days, while SPAC investors cannot sell for 180 days to one year.
What Is SPAC SOX Compliance?
During the SPAC lifecycle, the private company becomes public once the acquisition is closed. At this point, the newly formed company must start the internal control implementation, documentation, testing, and certification required for SOX compliance. Traditional IPOs have the advantage of time. Many private companies begin a SOX readiness program before going public, so they are compliant at the very beginning. SPACs, on the other hand, almost always start the process after the acquisition. While the new company may have a SOX exemption early on, the CEO and CFO will have to sign off on the financials, and in the end, run the risk of being subject to fines or penalties for non-compliance.
Consider SPAC SOX Timing
SPACs are quickly outpacing traditional IPOs, and with SOX compliance in mind, management teams in these companies should consider moving quickly into their first internal control assessment. SOX can be a time-consuming exercise, but the benefits of SOX for high-growth companies far outweigh the costs and should be embraced for long-term success. In the end, there are no shortcuts with SOX, and companies pursuing a SPAC merger should ensure they are adequately prepared.
Evan McParland, MBA, CISA, is a Senior Manager of Solutions Advisory Services at AuditBoard. Evan came to AuditBoard from KPMG, where he was an experienced manager in the Risk Advisory practice helping clients build out their SOX and Internal Control programs. Connect with Evan on LinkedIn.