SPACs are back, but will CFOs answer the call?

Like the Macarena, special purpose acquisition companies, or SPACs, are staging a comeback. CFOs interested in merging with a SPAC, though, or just considering the option, need to make sure their companies are ready for this type of IPO dance, according to attorneys who spoke with CFO Brew.

SPACs have spent the last few years trying to recover from the boom and bust of 2021. That year, a record-breaking 613 SPACs, or blank-check companies, went public in the US, raising $318.1 billion, according to recent numbers from financial data provider Dealogic. Many of these SPACs couldn’t find merger partners, and 330 (54%) ended up liquidating.

But now, SPACs are back. Roughly 122 blank check companies have listed their shares as of June 24 this year, according to Dealogic.

“There’s certainly an increase in recent SPAC IPO activity after the downturn…it’s not at the same level, though [as 2021]; people think it’s back, but maybe in a healthier way, maybe a bit more of a selective way,” Stephen Ashley, a partner at law firm Pillsbury Winthrop Shaw Pittman, told CFO Brew.

There were 254 SPACs seeking merger partners as of June 30, according to SPAC Research, a provider of data and analysis for the SPAC sector. So why consider merging with a SPAC to go public? They’re viewed as a faster and possibly cheaper route to the public markets than a traditional IPO. (Companies taking a traditional tack need 12 to 18 months to list their shares, while businesses merging with a SPAC can do it in three to six months, according to wealth management firm Certuity.)

In addition, according to PwC, SPACs “offer target companies valuation certainty, known ownership dilution up front, and the ability to negotiate customized deal terms.”

Clean financials. Companies thinking about a SPAC deal need to be prepared. Private companies looking to go public—either through a traditional IPO or a SPAC—need an audit by a PCAOB-registered firm, Ashley said. Most companies seeking an IPO in the near term, possibly in the next two years, should “start thinking about getting [the audit] ready well in advance,” so they can “do the work [and] make sure there’s no surprises,” he said.

Having a completed PCAOB audit can make a company “more attractive” to SPACs, Ashley said. This is because SPACs have finite lifespans. Once they go public, they typically have 18 to 24 months to find a company and complete a merger. If they don’t, the SPAC has to give the money it raised back to investors.

A potential SPAC merger may mean adding employees experienced at going public or who have worked at a public company, according to Anna Pinedo, a partner and global head of capital markets at law firm Mayer Brown. These teams will need to prepare periodic reports required by the Securities Exchange Act. “All of that is going to be important in terms of the CFO having a team to back him or her up,” Pinedo told us.

Standards have evolved. Back in 2020 and 2021, many SPAC merger candidates were unfamiliar with SPACs and their reporting requirements. Businesses that were merging with SPACs were often very early-stage, pre-revenue, Pinedo said. “Now, the types of companies that we’re seeing are much more seasoned, with real operations, significant employees, and have revenue, and therefore can speak to an actual operating history.”

Investors in the SPACs that launched in 2020 and 2021 were also often new to the product, Pinedo added. Many of those sponsors have fallen away, she said. The current crop of SPAC sponsors “are a lot of the traditional private equity, long-time participants in the SPAC market.”

However, private companies need to do their homework on any SPACs that come calling, Pinedo advised. “Definitely consider and talk to a number of SPAC sponsors and understand the track record of those SPAC sponsors, the economics, and the promote [post-deal stake] and incentives of those SPAC sponsors,” she said.