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Are companies targeted by SPACs ready for the next steps?

A growing number of SPAC sponsors are requiring target companies to undergo IPO readiness assessments.

By Rob Gould and Christopher Wright, Protiviti

A frenzy of initial public offering (IPO) activity is on pace to hit record volume and surpass the record-setting 406 IPOs that raised $93 billion in 2000. In the third quarter alone, 94 IPOs raised a total of $28 billion, making it the busiest quarter by deal count since 2000, and bringing the total number of IPO filings to 417 and total proceeds raised to $155 billion, as of October 8, according to data from Renaissance Capital.

Rob Gould, Protiviti

But those statistics don’t include special purpose acquisition vehicles (SPACs). At the end of the third quarter, 449 SPACs had raised $129.1 billion in the IPO market. That’s 81 percent more deals than SPAC sponsors took to Wall Street for the full year of 2020, and $45.7 billion ahead of the capital raised.

Unlike companies that complete traditional IPOs, companies that go public via a SPAC must meet a wide range of requirements on day one. Unfortunately, because the deals are often consummated within a tight time frame, SPAC sponsors in some cases have discovered too late that the target companies are unprepared for the scrutiny demanded of public companies. Consequently, a growing number of SPAC sponsors are requiring target companies to undergo IPO readiness assessments to ensure that not only are the organizations viable, but that they also possess the financial and governance fortitude to thrive in the public company sphere.

Target companies that do not undertake assessment – or that fail to perform one effectively – face any number of financial, reputational and regulatory risks. For instance, missing filing deadlines and misstating or making incomplete disclosures can result in a collapsed stock price and, worse, can lead to fines, trading suspensions, de-listings and shareholder lawsuits.

Chris Wright, Protiviti

A critical step

Therefore, SPAC sponsors and investors need to take a pro-active approach to encourage a strong, thorough and diagnostic pre-IPO assessment of a target company’s current state compared with the future requirements in a variety of areas. At Protiviti, we help organizations prepare for the work ahead, particularly those that are operating with a heightened sense of urgency, like SPAC targets. Some of the most common gaps identified by an assessment include:

  • Legal and regulatory. Private companies are unfamiliar with the sweeping audit and financial requirements for public companies under the Sarbanes-Oxley Act of 2002 (SOX), and it can take an arduous four to six quarters to fully prepare for compliance. In recent guidance, the SEC suggested that some SPAC targets may avoid accelerated SOX 404 reporting in their first year.
  • The team. Ideally, team members should possess previous IPO experience and have the knowledge and bandwidth to participate fully in the readiness exercise, but personnel shortages in this area often hamper the effort. Public company transformation can unduly stress organizations that rely solely on internal resources to prepare for a listing while running the day-to-day business.
  • Processes and infrastructure. Private companies frequently lack the business processes and infrastructure needed to compile financial reports that would withstand SEC scrutiny. Moreover, discipline within the reporting function in many cases is not a high priority.
  • Risk management. Entering the public domain presents private company executives with numerous new risk management matters to consider. Liability insurance for directors and officers, the creation of an audit committee and auditor independence are just a few.
  • Governance. Similarly, SEC rules overseeing the composition of the board of directors are another novel concept for which private firms are typically unprepared. The regulator also requires an effective internal control function, a transparent investor relations function, and a commitment to identifying related process improvement opportunities.

Once a baseline of the current state of the company is established, a project can be built to address weaknesses and implement solutions. Often tapping external resources to augment existing capabilities can help companies bridge gaps in subject-matter expertise and internal bandwidth that otherwise could slow progress.

Time is of the essence

Entering the public market is an important milestone and sign of success that sets the stage for expansion – not only does it provide companies with access to substantial financial resources, but it also gives early investors an exit strategy. While many private companies are taking advantage of today’s record-setting SPAC activity to make the leap to the public market, the transition can be complex, difficult and time-consuming. But those that put in the necessary work to prepare will be best positioned for the benefits that accrue to listed organizations.

Rob Gould is a managing director and leader of the global private equity practice at Protiviti, and Christopher Wright is managing director and global leader of Protiviti’s business performance improvement practice. For more: Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions