Examining Current Trends in the de-SPAC Process

In the lifecycle of a SPAC (special purpose acquisition company), the De-SPAC process formally begins after a private target company has been identified for acquisition by the publicly traded SPAC sponsor. This identification is followed by negotiations, shareholder meetings, proxy statements, SEC reviews, and ultimately a final agreement for the transaction. Often taking several months, the de-SPAC process is usually the longest procedure during the SPAC’s lifetime.

With the SPAC market continuing to flourish as more sponsors and target companies enter the market, certain trends are surfacing as more focus is placed on the market—including from the plaintiffs’ bar.

Below, we’ll cover four key areas of de-SPAC transactions that have since emerged and examine the current trends surrounding them.

Current deal dynamics within the increasing supply of SPAC capital

With $166 billion in SPAC-led deals announced in the first quarter of 2021, and 500+ SPACs currently looking for target companies to acquire, there is an unprecedented amount of available capital in the market today.

This has created a shift in dynamics among both sponsors and potential targets, which is playing out in several ways for private companies:

  • The process of going public now happens faster. Prior to the SPAC boom, many private companies would have likely remained on a slower trajectory for going public via the standard IPO route. Such companies are generally aware of the increase in potential sponsors and have likely given substantial thought to their public company readiness, making them more appealing to a sponsor.
  • Private companies can market on forward-looking information. Earlier stage companies that are pre-revenue or pre-bid can market a deal to pipe investors on the back of forward-looking information, which is not typically done with an IPO.
  • More certainty and confidence for private company valuation. The opportune window to go public with a standard IPO is often small and unpredictable due to market volatility. If a private company announces a deal with a SPAC sponsor, they effectively avoid macroeconomic risks of an IPO, such as the window closing, or a lackluster roadshow—two factors that routinely derail the IPO process for private companies.

The importance of pre-close diligence

From a governance perspective, the flurry of SPAC transactions (and failed deals) has highlighted the need for a minimum standard a private company should ideally meet before considering itself ready for the de-SPAC process.

The SEC has hinted at implementing new restrictions for SPACs in the near future, many of which may closely resemble the current standards for companies going public via traditional IPOs. This suggests that private companies and their respective boards should assume compliance with relevant SEC and stock exchange rules—particularly around financial reporting—and ask themselves if their business and financial statements are truly ready for public scrutiny—just as they would with a standard IPO process.

In addition, failing to understand how SPAC insurance works can lead to problems post-close in the event of a loss or claim; read more about de-SPAC transaction types and insurance implications.

Early-stage private companies looking to capitalize on the current SPAC market should allow the necessary time to meet those burdens, as they will be highly important post-close.

How de-SPAC deal litigation is evolving

The SPAC market faces a heightened sense of scrutiny in regard to de-SPAC M&A litigation, making it critical for both the sponsor and target company to facilitate thorough diligence and disclosures prior to the deal. This ensures a price that is supported by the pipe investors and the eventual public market, which sets up the companies and lawyers to put the right disclosures in place to mitigate any litigation.

Even with safe harbor laws in place, the company is protected only in the context of private litigation—not any SEC enforcement action—so it must remain mindful of that exposure.
From the target company’s perspective, conducting their self-assessment early on can pinpoint any issues or liabilities and provide enough time to properly address them.

Transparency with the sponsor is essential, as it allows the legal teams to assess and plan for any potential risks, rather than being exposed during the de-SPAC process.

What can improve the chances of post-close success?

De-SPAC success can often be pinpointed to the management team and company boards. These groups should spend sufficient time ensuring their business is ready to be under public scrutiny and has the right internal processes and infrastructure in place to execute as a public company from day one.

Maintaining reasonable expectations about company valuation is also a critical aspect of a seamless post-close, as de-SPAC transactions are not a license to market a potential deal on the basis of projections that turn out to be misleading.

Insurance Needs For A Special Purpose Acquisition Company

Woodruff Sawyer is a market leader of working with SPACs on both the initial IPO process and the de-SPAC business combination and is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a key element of the SPAC M&A process.

For further reading: