Special-purpose acquisition companies (SPACs), often referred to as “blank-check” companies, raised more than $94.4 billion last year and shattered 2020’s record-setting raise of $83.2 billion – which, in its own right, was up more than 2,000 percent. Embedded within last year’s SPAC IPO numbers were more than 200 target companies acquired in deals involving – in whole or in part – a SPAC. As we settle into the current year, financial sponsors continue to raise bountiful “blind pools” of cash within the SPAC market while many others wait in queue for IPO approval from the Securities and Exchange Commission.
Without question, SPAC mergers have once again become prolific and are likely to continue breaking records in 2022.
After the global financial crisis cooled things down in 2007, SPAC momentum stalled for almost a decade before investors grew tired of waiting for long-term private equity options to mature and privately held companies retired the strategic partner idea. By comparison, cashing out via a SPAC merger offers target company owners and investors an expedited timeline to close along with management-tied deal incentives to spearhead growth. All of this comes at a low cost when compared to the next most likely alternative - a traditional IPO.
However, caution is required when wading into these waters as SPAC deals are far from simple and require heavy-lifting from both internal and external accounting advisors and financial partners. Additionally, and while prior precedence exists from the volumes of closed SPAC IPOs, these types of mergers are closely regulated by the Securities and Exchange Commission. Professional teams, frequently competitors in the accounting industry, will often find themselves working together on the same SPAC merger – in parallel workstreams in order to meet the demanding filing timeline. This is due to the rigorous IPO-like filing requirements of the privately held company which must be completed on a shortened timeline given the expiration date of the SPAC merger vehicle. In the event a deal is not completed by a specified date, the “blank-check” company or SPAC must liquidate cash-in-hand and the target company is left to absorb deal expenses and begin the process once more.
SPAC transactions often incorporate other specialized tax structures. One of these is the umbrella partnership - C corporation structure (“Up-C”) which combines a flow-through entity with the eventual public company. This allows the flow-through entity to access the public markets while still retaining some of its original, attractive tax attributes.
It is essential to align with a seasoned accounting team that can provide practical advice while performing pre-acquisition due diligence, handle SEC filing requirements, deliver required audit history models, and meet deal deadlines under the pressures and constraints of a SPAC expiration timeline.
Count on Friedman LLP
Friedman’s corporate tax advisors have worked closely with some of the largest SPAC sponsors over the past several years and have direct experience responding to comments posed by the Securities and Exchange Commission during the approval processes. Professionals within our team understand the demands of the public readiness process and study the many SPAC IPOs that have closed to date.
Among the responsibilities Friedman’s corporate team assumed to help consummate a recent transaction were:
- Modeling the income tax consequences of the “Up-C” transaction that incorporates future sales/exchanges, Tax Receivable Agreements and earnout payments for both Legacy Members and Option Holders;
- Collaborating with numerous accounting teams in updating required Financial Statements during multiple stages of Public Company Readiness, as well as meeting deliverables during the closing phase of the transaction; and,
- Preparing Quarterly and Annual Tax Provisions for the public entity of the “Up-C” structure during pre- and post-transaction cycles.
Your corporate finance transactions require an advisor with a very particular set of skills. Your Friedman LLP advisor has those and stands ready to help you close the deal. Contact us now with any questions.