Life as a newly public company requires processes, policies, and people to manage governance, IT, financial reporting, and tax, to name a few.
The special-purpose acquisition company (SPAC) process demands significant attention and energy for all parties, especially the CFO of the target company. It is tempting to see the process of winning investor approval, communicating your story to potential investors, raising private investment in public equity (PIPE) funds, and timely completion of the transaction as the end of a strategic and monumental task—and it is. However, another set of challenges awaits just beyond, as the target company is launched as a newly public company.
In a traditional initial public offering (IPO), the company builds toward the first day of trading as a consequence of the pre-IPO process. A traditional pre-IPO company produces SEC-compliant audited financial statements, designs, and implements systems to facilitate timely and reliable reporting, builds internal controls over financial reporting, validates processes critical to cybersecurity and information technology, and prepares critical filings for regulators and investor review.
The SPAC process involves many of these same hurdles, but the target company’s management must remain focused on executing the transaction first before tackling post-SPAC processes. Therefore, this post-SPAC work falls to the post-SPAC company and its officers, who must play “catch-up.”
The one undeniable fact of this “catch-up” process is there can be no missed deadlines. Failure can imperil the success and credibility of the newly public company.
A post-SPAC company must be ready with certain filings, processes, and policies in place just prior to the first day its shares are traded. And the company must also report accurate financials on time—depending on filing status, this could be in as few as 40 days after the end of its most recent financial quarter. These form the initial deadlines for the post-SPAC process.
Some post-SPAC companies already have many of the structures and policies of a public company in place. But not all do. In fact, for some post-SPAC companies, it will be a fresh-build challenge.
Some leading practices to meeting the demands of the post-SPAC process include:
Developing a realistic plan for meeting key milestones in each of these issue areas while the SEC is reviewing the SPAC S-4/proxy filing (if SPAC readiness assessment processes were not already completed by the company prior to the filing).
Determining the core competencies that can be built around internal capabilities and leveraging qualified service providers for others.
Communicating with board members and management the critical milestones they will need to be aware of in the process and providing guidance so they can work collaboratively.
Since no two post-SPAC companies will be the same, the plan and workload will need to be tailored for each company, with likely many of the workstreams running on parallel tracks. Each post-SPAC company must address a number of matters that can be broadly categorized into six workstreams:
Finance and Accounting: Closing financial reporting and quarterly earnings and other financial disclosures on time.
• Accounting policies and benchmarks need to be defined and implemented, which may require support from dedicated professionals.
Corporate governance: Corporate board oversight is essential prior to listing; a portion of the board must be independent and non-management, and board members need to understand their responsibilities and fiduciary duties from day one. Overall governance measures need to be in place throughout the organization.
• Compliance is a critical function for the establishment and implementation of a range of internal controls and policies that are required by law and various regulations. Certain compliance standards depend on the presence of a rigorous self-reporting mechanism for regulatory failures, for example.
Internal processes & controls: Even prior to reporting the first quarter of earnings as a publicly-traded company, significant controls and processes need to be in place to meet regulatory requirements. These center around rules, often in the Sarbanes-Oxley (SOX) Act of 2002, to create internal controls and related policies that are aimed at safeguarding of assets, reliable financial reporting, and reducing the risk of fraud.
• As part of any internal control structure, key functions must be established to have segregated and reportable processes and policies covering a range of core functions including Finance and Accounting, IT, Treasury, Compliance & Legal, and Human Resources. These functions meet both operational and regulatory requirements, and therefore should be viewed as essential for a publicly-traded company.
Information Technology (IT): With information being a crucial asset in the modern corporation, IT as the custodian and protector of this information has a front-row seat for major executive-level issues and discussions. But many organizations in the post-SPAC phase have comparatively bare IT organizations and capabilities in place.
• Enterprise Resource Planning (ERP) solutions are information enablers to key departments such as finance, human resources, and operations, as an organization seeks greater performance and sustainable growth. Selecting and implementing the appropriate scalable ERP solution is a crucial early step.
Cyber: Related to IT, an organization’s cyber capabilities will be tested every day. But because so much of an organization’s operations and value is tied with its ability to protect data and maintain operations after a cyber threat is discovered, this capability can’t be delayed.
• Business continuity and disaster recovery plans are essential protocols to guide executives and the board during a cyber incident.
Tax: Tax is often central to financial reporting and transaction planning. The post-SPAC company can emerge in a much more complex tax situation than prior to the SPAC transaction. Many of these complexities relate to the resulting tax structure which is designed to accommodate both the legacy owners of the company and the shareholders of the SPAC.
• Companies previously operating in passthrough status for tax will likely become part of what is known as an Up-C structure; where the public SPAC corporation acquires and holds an interest in a target partnership with both entities remaining, resulting in the need for income tax provision calculations for the addition of a corporate entity.
For additional information contact:
Audit & Assurance Partner
Deloitte & Touche LLP