De-SPAC: Definition & from SPAC to public process
Private businesses have many reasons to want to go public, including broadening opportunities for future access to capital and creating brand awareness. To help private companies become public, a SPAC, or a Special Purpose Acquisition Company, acquires the private company. This acquisition is called a de-SPAC transaction.
The de-SPAC process is often shorter and more direct than an IPO filing. However, the business valuation may not be accurate since, unlike IPOs, it’s not based on market demand. de-SPAC transactions have pros and cons, which we see in our breakdown below.
Understanding de-SPAC transactions
A de-SPAC transaction is a step in changing a private company into a public one. The SPAC (a business entity) raises capital and identifies a target (a private company), and if successful, the SPAC and the target private company merge. The result of this is known as a de-SPAC transaction, where the initial target company now becomes a public business with access to the SPAC’s resources.
The de-SPAC process step-by-step
Even though the de-SPAC process might initially seem overwhelming, you can break it down into five steps. Remember that a de-SPAC transaction is the result of what the SPAC and private company undergo.
1. Identify a private company target
The first step in the de-SPAC process is to identify the private company that the SPAC will acquire. This process involves careful consideration of the following criteria and factors:
- Company culture: Like all mergers and acquisitions, aligning company values is necessary for the future vision.
- Financial performance: The private company must show solid financial performance to highlight a similar future.
- Industry alignment: It’s best when both the private company and the SPAC operate in similar sectors and industries, making both parties subject matter experts.
- Growth potential: The private company must have growth potential with scalable practices. Otherwise, the acquisition (and future successes) will stagnate.
2. Negotiate agreement
The process's merger agreement phase outlines the transaction's terms and expectations.
Key components of the agreement include:
- The agreed-upon valuation and pricing
- Merger considerations
- Closing considerations like financing
- Potential termination fees
The specifics of the merger agreement can vary depending on the industry and specific circumstances. Both parties should review the agreement and negotiate terms carefully if necessary.
3. File SEC paperwork
After the merger agreement is settled, the SPAC will file an S-4 registration statement with the SEC detailing important information about the target company, the proposed merger, and the combined company’s financial projections.
When filing with the SEC, the SPAC must provide several disclosures detailing scrupulous information about the private company they plan on acquiring and how the merger will be settled. These disclosures include the SPAC IPO Disclosure and the de-SPAC Transaction Disclosure.
4. Participate in the closing process
After shareholders gain approval of the merger by vote, both parties will conduct one last round of due diligence to make sure that all pertinent information is received. Closing documents, including the merger agreement, stock purchase agreement, and other necessary documents will be prepared.
The trust fund that the SPAC set up is used for the cash payment of the deal, and a formal closing ceremony is held, during which representatives from both parties sign the final agreement documents.
5. Fulfill post-merger obligations
Post-merger, the de-SPAC must file periodic reports with the SEC, including annual, quarterly, and any current reports for significant events, in addition to proxy statements. The new company must maintain healthy lines of communication with investors by providing earnings calls and press releases.
Differences between a de-SPAC and IPO
While de-SPACs and traditional IPOs share the common goals of raising capital and increasing liquidity to make a business go public, their approaches differ.
De-SPACs offer a faster pathway to public markets, which can benefit companies with unique business models or new product technologies. However, it’s crucial to note that overvaluation and regulatory oversight can also occur with de-SPACs.
Traditional IPOs are generally the more established and regulated way to go, though this process can be time-consuming. These often offer a more realistic and accurate market valuation, though the IPO process can be subject to more strict regulatory compliance processes.
Pros and cons of de-SPAC transactions
De-SPAC transactions have their fair share of positives and drawbacks. It’s important to evaluate the potential benefits and associated risks before entering into a de-SPAC deal.
De-SPAC pros
De-SPACs have become increasingly popular over the years, in part due to all of the advantages they carry.
- The speed to market of de-SPACs is often quicker and less complicated than traditional IPOs.
- The access to capital is greater for de-SPACs, allowing for debt repayment or other acquisitions.
- Lower regulatory burdens impact de-SPACs when compared to their IPO counterparts.
- There is a certainty of valuation for de-SPACs since they have a pre-negotiated valuation, whereas a traditional IPO business valuation is based on market demand.
De-SPAC cons
Despite the many upsides of de-SPACs, some downsides must be considered before entering this type of deal.
- De-SPACs have faced increased regulatory scrutiny from the SEC over the years, which can lead to overall delays.
- Since many SPACs are young and new, their associated sponsors may not have a solid record of success, making it difficult for investors to assess the deal thoroughly.
- De-SPACs have increased legal considerations like strict SEC disclosure requirements, the need for enhanced projection disclosures, and strict compliance with executive compensation arrangements.
- De-SPAC shareholders can redeem their shares before the merger is completed. These shareholder redemptions can cause a significant loss of available capital for the business.
De-SPAC best practices and tips
If looking to enter into a de-SPAC deal, there are some best practices to help minimize the risks. To avoid not raising enough capital or a complete fallout between the SPAC and the target company, consider the following:
- Practice due diligence by completing a comprehensive review of the SPAC’s financial statements, business operations, and governance structure.
- Effectively communicate throughout all levels of the de-SPAC transaction, remaining transparent with investors, employees, and regulators. It’s also best to build strong connections with investors to address any concerns as they arise.
- Avoid common de-SPAC pitfalls like valuation mismatches, sponsor conflicts of interest, and operational challenges like scaling or financial reporting.
- Consider pursuing advice from accounting and financial experts. With account management software like Intuit Enterprise Suite, you’ll have dedicated support designed to meet the complex needs of your business.
Boost productivity and enhance profitability
Switching from a private company to a public one can raise business capital, increase brand awareness, and position the company to acquire other businesses. Whether you choose the means of traditional IPO or de-SPAC to take your business public, Intuit Enterprise Suite has you covered with streamlined tools and dedicated support to ensure a smooth transition into the public trading sector.