Often when I’m called for advice, I start by asking if their company is ready to operate as a publicly traded company. If the answer is no, there is still work to be done before the company is ready to go public through a SPAC.
What I find is often a misconception about the market by target companies wanting to tap into the capital markets through a SPAC in that the target company doesn’t need to be as mature or submit to the same regulatory requirements as the traditional IPO or direct listing route. This is simply not the case. The target company is still expected to obtain approval from regulators. Once the de-SPAC process is complete, the company will be listed on the stock exchange and the path to get there, whether it is a traditional IPO, SPAC or direct listing, regulations on a listed company are the same.
It is true that the IPO timeframe through a SPAC is usually shorter than the traditional IPO route, so it is essential that the target company can show the sponsor that it essentially operates as a public company.
Let’s go over some key considerations that a technology or life sciences company looking to be acquired by a SPAC should keep in mind.
Accounting and tax considerations:
- Are my tax and accounting departments adequately prepared for the transition to a public company?
- Do relevant staff retain the skills necessary to apply and adhere to more complex accounting standards?
- Do my current policies and procedures take into account highly scrutinized areas such as revenue recognition, lease accounting, and stock-based compensation?
Preparation of financial statements:
Assessing a target company’s financial statement preparation procedures is one piece of the financial health puzzle.
The things I encourage companies to think about are:
- Are my company’s financial statements prepared in accordance with the reporting requirements of the United States Securities and Exchange Commission (SEC)?
- Do my company’s financial statements include the required level of disclosures, footnotes, management reporting (MD&A), etc.? ?
- Is my company ready to develop pro forma financial information in accordance with the future SPAC transaction?
Compliance with required filings and registrations:
Once public, there’s a whole new set of acronyms to learn: AICPA, PCAOB, and SEC. Converting auditing standards and accommodating various independence rules can be a challenge.
Here are some questions to consider:
- Have we converted the audit of our financial statements from AICPA to PCAOB standards?
- Is our auditor a PCAOB-registered public accounting firm that is independent under the independence rules of the SEC and the PCAOB?
- Is my business ready to complete the necessary registration declarations?
Internal controls and Sarbanes-Oxley (SOX) compliance:
Companies will need to assess their internal control environment and their ability to comply with SOX requirements. I encourage companies to try to answer these and other questions about internal controls to better gauge their readiness.
Here are some questions to consider:
- Are policies and procedures for key areas of my business related to financial reporting formally documented and reviewed periodically?
- Has management established clear reporting lines and an effective tone at the top?
- Are periodic assessments performed to identify risks to achieving my organization’s objectives?
Finally, cybersecurity and information technology
There’s so much to consider here for businesses, but basically it’s paramount to have a solid IT infrastructure that has the ability to scale with the expected growth as a result of the newly injected capital from the introduction on the stock market, as well as a strong cybersecurity posture.
These are just a few of the key areas tech and life sciences companies should focus on when assessing their IPO readiness through a SPAC.
To learn more, visit our SPAC Knowledge Center or start a conversation with us.