The De-SPAC

The most intense phase of going public through a Special Purpose Acquisition Company (SPAC) is the De-SPAC process. De-SPACing is the stage after execution of a definitive agreement between the parties (i.e. the acquiring company and the target company) and before the actual combination of the public entity with the private target company. A De-SPAC is similar to a merger in the sense that you end up with two companies combining, and it is also similar to an IPO because, like an IPO, you have a previously private company that is now publicly traded at the end of the process. Like both a merger and an IPO, there is a laundry list of action items in the De-SPAC, including S-4 filing, shareholder approval, redemption offer, and super 8-K disclosure. 

S-4

Once a final agreement is signed and the deal is announced publicly, an S-4 proxy financial statement must be submitted to the SEC with audited numbers and a prospectus. In addition to audited financial statements from both the SPAC and the target company, the S-4 must include the following:

• Managerial discussions about the SPAC and target company,

• Historical financial data from both parties,

• Cost-per-share information,

• Description of the structure of the post-acquisition company, and

• Debt financing agreements related to the De-SPAC, if relevant.

 Once this is all filed, the SEC will review the submission and ask for comments from the company if it has any questions or concerns. 

Shareholder Approval

Typically, the buyer in a SPAC transaction is required to obtain shareholder approval through an SEC-compliant proxy process. Stock exchange rules do not always require such a vote, but if the acquiring company in the De-SPAC is issuing 20% or more of its shares during the process, a vote is required. In reality, this means that most De-SPACs require a shareholder vote, which requires filing a proxy statement with the SEC, review and comment on the statement, mailing proxy statements to shareholders, and holding a shareholder meeting. The target company, however, is not required to obtain a vote through SEC-compliant processes. 

Redemption Offer

As previously stated, a SPAC places all capital raised during its IPO into a trust. During the De-SPAC process, the acquiring company is required to offer certain public shareholders the right to redeem their public shares for a pro rata portion of the proceeds held in that trust account. According to the stock exchange listing rules, companies are only require to offer the right to redeem shares to those who voted against the transaction when the vote was held. 

In the rare event that a shareholder vote is not required (and the company does not elect to hold one), the acquiring company must instead conduct a tender offer that holds substantially similar information to what would have been in the proxy statement to all public shareholders. Additionally, if the transaction never occurs, the public shareholders are entitled to get their money back. 

Super 8-K

The SEC requires that SPACs file a special Form 8-K, commonly known as a “Super 8-K,” containing all the information that would typically be required in a Form 10 registration statement (the traditional registration statement for companies going public). This typically involves:

• Description of all Property

• Description of the Business

• Risk Factors

• Financial Information (including 3 years of audited financial statements, selected financial statements, MD&A, and quantitative and qualitative disclosures about market risk)

• Director and Executive Officer Biographical Information

• Executive Compensation

• Owners, Directors, and Executives with Ownership of ≥5%

• Transactions with Related Persons

• Material Pending Legal Proceedings

• Description of the Registrant’s Securities

Much of the financial information required would be included in either the proxy statements or tender offer already, but the SEC may ask for additional information about the target company. 

What Does the De-SPAC Mean for Companies?

Because they are registrants consisting solely of cash and cash equivalents, SPACs are “shell companies” under the Securities Act of 1933, as amended. SEC regulations limit what current and former shell companies and their shareholders can do. They also limit what exemptions and safe harbors are available to them. Some of these limitations include that:

• Former SPACs are not eligible to register securities offerings until at least 60 days after filing a Super 8-K;

• Stockholders of former SPACs are required to hold their equity for a period of twelve months from the date of filing the Super 8-K before they can rely on Rule 144 to sell their equity without registration;

• SPACs and former SPACs may not use the “Baby Shelf Rule” (which permits registrants with a public float of less than $75M to use short-form registration statements for primary offerings) for twelve months after the Super 8-K filing.

SPAC Help

If you need assistance with understanding what a SPAC transaction would mean for your company and whether it is right for your specific situation, we would love to help you. At the Law Offices of Destiny Aigbe, we are dedicated to our securities law practice and helping you find success. Let us know how we can help you find success today.