Two Years in the Life of a SPAC
By Justin Meyer
Companies working to get acquired by a Special Purpose Acquisition Company (SPAC) need to plan far in advance; and SPACs, before they even get started, need to make sure that everything they are doing is ready for the acquisition,. Why? Because the SEC keeps a close watch on these blank-check IPOs and makes sure that they dissolve when their time is up.
You didn’t know that SPACs expire? The standard is 18 months. If, after that time, there is no purchase document, the company must dissolve. A purchase document does not require a contract to be signed, it could be a letter of intent or some other agreement. However, if there is nothing in place, the company is done.
The time restraints do not end there, however. At 24 months, the SPAC must dissolve, if the purchase has not been completed. No matter where in the purchase process the companies are, once that magic number is reached, the black check is voided. This clause comes in even if the contract is signed, but the SEC has yet to approve the deal.
That’s right, there’s no extension for SEC approval past that 24 month window. So no matter where the deal is, unless it is consummated and given the government stamp, it’s done. What does this mean for the company that was to be acquired? It gets left out in the cold. Unless there was something in the previous agreements, do not expect any compensation from the now-dissolved SPAC, as they probably do not have any money left (the money that was held by the company is distributed back to the investors with interest).
What does this mean for small companies looking to be acquired by SPACs? It means that before you commit to anything, you need to do your due diligence as well. Here’s what you should look for:
- Past experience – Is this the first time for this management team? Have they been through the process before? If it’s their first time, who is bringing them through the process, and what is their background?
- Consistency – One of the biggest hold-ups before the SEC is when things change. Did the auditor change mid-stream? Are they switching titles like they might swap stories? Or is the same team involved from start to finish, with the same leadership.
- Time – How long has this company been around? Are they just starting or did they form a year ago. On average, SEC approval takes between six and eight months, during which time they will review the SPAC’s documents again as if it were an IPO when it is making the purchase, not when it files its original documentation.
- Other companies – Are they looking at other companies or are they sold on yours? And if they are looking at multiple companies, how long before they make a decision?
On your end, here’s what you should do to make sure that you make the process as easy as possible:
Make sure your accountant and attorney are familiar with SEC requirements. Before you start the acquisition process, have SEC-compliant procedures in place.
- Have everything read for the acquiring company to review so that they can complete their due diligence quickly. The best way to do this is to go through the due diligence process on your own, examining all of the documents yourself. This has the added advantage of preparing you so there are no surprises.
- Prepare filings in advance so you are not scrambling at the end to put things together.
SPAC deals, as they become more and more commonplace, are going to go through many changes. The SEC found itself unprepared for the amount of deals that would go through but that should change. In the meantime, the more prepared you are beforehand, the easier the deal will be to consummate once it starts to go through.
This article was originally published in Due Diligence Digest. ©2006. Used with permission.