Demetrios Frangiskatos, CPA, Co-Leader of BDO’s SPAC (Special-Purpose Acquisition Company) Assurance practice, joins Count Me In to talk about what companies need to know when it comes to SPAC-associated risks and considerations. Demetrios specializes in mergers and acquisitions, initial public offerings, internal controls and reporting audits, and all aspects of SEC reporting. His background includes engagements both domestic and international, ranging from emerging-growth to Fortune 500 companies. In this episode, you will hear about factors that are currently driving SPAC activity, what the implications are, and the outlook for the rest of 2021 into 2022. Download and listen now!
Welcome back to Count Me In, IMA's podcast about all things affecting the accounting and finance world. I'm your host Mitch Roshong and this is episode 137 of our series. Today's conversation is between my co-host Adam and the co-leader of BDOs SPAC assurance practice, Demetrios Frangiskatos. The SPAC, Special Purpose Acquisition Company market has long-term implications that cannot be overlooked. Demetrios joins us to explain factors currently driving the market as well as other considerations and risks. To learn more, keep listening as we head over to their conversation now.
Demetrios, thanks so much for coming on the podcast today. To start off our conversation, where's the SPAC market now and what factors have been driving its activity and is it still a viable option to going public today?
Thanks for having me, Adam and looking forward to our discussion. Yeah. You know, the SPAC market has been on a roller coaster ride over the last probably 18 months and all of it is sort of been going up just at different speeds and different levels. The market right now is probably a little slower than it has been, you know, earlier on in the year with regards to initial public offerings and raising capital through the pipe market, but there's been no indication from, you know, whether, the bankers,, attorneys sponsors, what we're seeing in the marketplace that it is still a viable option. We're still seeing activity. We're still seeing SPACs raising money. We're still seeing spot sponsors, which include asset managers and strategics and high net worth individuals who have had a lot of success in doing M&A, looking to raise capital. So I don't see it slowing down. I think we were sort of in an unprecedented market at the beginning of the year and that incline had started from the year before, and that might've been a pace that was difficult to continue following. But it still seems like it's going strong and you're still also seeing even the traditional IPO market go strong. So they both seem to be viable, options that are continuing in the marketplace, as well right now.
So back in April of this year, the SEC issued a new guidance regarding, related to warrants that seemed to shake up the market. Can you talk about what happened there and what implications were for sponsors and target companies alike?
Yeah, of course. Yeah, that was, that was a bit of a splash in the market with respect to the accounting behind warrants was dealt with in a certain way for a long period time and with the SEC statement it changed the direction of that accounting from what was fairly easy to account for the warrants as equity instruments, to if the warrant instruments had certain clauses they would have to be reclassified as liabilities. And what did that do, that caused, you know, there was at least 400 SPACs out in the market that raised capital, that had to reevaluate it. That was de-SPACs that occurred in the marketplace, where the warrants carried over from the original offering into the new operating company that became public that had, restatements. So it caused quite a bit of noise. And, you know, the timing was interesting because the statement came out in April and then in March, I shouldn't say then, but prior to that in March, we had started seeing a little bit of a slowdown in the market. I think the pipe market was reaching a bit of a capacity point in how much private investment was going to go into these SPACs and the combination of those two really, really put a pause in the marketplace. And it took, it took about, you know, maybe a couple of months for the market to start getting back up and going and enough time for the companies to evaluate what the rules mean with their current equity instruments, you know, attorneys to evaluate the structure, including the bankers. And initially there was a lot of hesitation and what to do, whether to file new SPACs with, you know, the legacy terms and my ability accounting, try to restructure these agreements so that they have equity accounting, and that started shaking itself out and initially we saw mostly filings of you know, saw the restatements on the old, on the existing companies. We started seeing filings of SPACs with, warrant instruments with liability accounting, and now we're starting to see a shift where the sponsors and the bank community and the attorneys are working on instruments that will, get these warrant instruments to equity accounting and you know, we're working through several within our firm as well, so you're starting to see the market evolve and address some of the concerns that the SEC presented in their statement.
Can you maybe touch on the regulatory focus that continues to increase, such as the current chair's Gensler's the statements that he's made?
Yeah, no, of course. I think, you know, you're going through changes in the administration right now, because of the presidential change so that's, we'll probably gonna see some shifts in regulatory focus and, you know, the appointments that are being made and coupled with, you know, Gensler's comments, maybe a month, month and a half ago, he was talking generally about the capital markets and there's been an uptick both in traditional IPO's, and that there's an expectation that will continue. But did talk about SPACs, and their sort of their resurgence from, you know, these were vehicles that existed several years ago, or much longer than several years ago, but they just weren't, they weren't being used as often and obviously now the activity is tremendous. And he was, you know, he was focusing on our investors protected appropriately with these SPACs specifically. I think his focus was on retail investors and them getting the appropriate information, that they need both on the initial IPO stage and in the de-SPAC when the target is the operating companies identify and the DSPAC occurs and I think he was cuing that there should be some focus on this and make sure with the volume that's going on that the disclosures and the information flow that's getting to investors is at the right level. And, the second point he raised, which I think has always been something that's been a focus is, just generally speaking the efficiency of the vehicle and whether, you know, is how it compares to traditional IPO. Obviously, the SPAC sponsor is the ones that are raising the capital and are the ones that are looking for the operating company. There's a certain level of dilution and costs that they bring to the table. The SPACs that we're you know, in the current market, maybe several years ago, they didn't have pipes, but now they have pipes which are private investments in public equity. So there's significant capital being raised through that and that they're getting discounted pricing. So the combination of all that is a concern that gets brought up, are the retail investors aware and, are they properly, being, you know, evaluating their decisions with the information for what's going in? So it's clear that there's going to be some heightened focus on SPACs, disclosure, the right level of information for investors, and then ultimately I think when these operating companies de-Spac into the entity and become new public companies, just that there's a right level of a bigger focus on the financial reporting side. I think you had seen several statements from the SEC earlier on in the year just about things that investors should be aware of with these vehicles and some of the risks that they pose. So there's no doubt, there's no doubt and we're seeing it as well. There's a very heightened focus on these vehicles and where they're going. And, I think more to come, right, I think with the change in the regulatory body, or the individuals in the regulatory body, and some of these statements it's clear that there's going to be a, there's probably going to be more focus obviously like I mentioned, and probably some changes come.
Definitely. Now you just mentioned the sponsors of a SPAC transaction. Could you maybe break down everyone that's involved in the SPAC such as like the target, the auditor, et cetera, just so we can get a full understanding of what that takes?
Yeah, no, of course. So typically, what you see in a situation where a SPAC, is created and wants to raise capital is certain individuals that are viewed as the sponsors of the ones that are effectively driving. They're going to drive this SPAC to buy a company, formed together and come together and generally speaking, maybe they think about, you know, their expertise, areas of focus that they've had in the past, whether it's healthcare, financial services, technology, and they combine certain individuals that are viewed as the sponsors because they're the ones that have the experience and sort of having the vision of what they want this vehicle to do. And then once they do that, they get together and come up with sort of their strategy or their plan and what they want to do, you know, what kind of company they want to buy, how much money they need to raise, and what markets they want to chase that because they also want to use their experience in order to help, you know, execute on this transaction and potentially help the company in the future once that these SPAC happens. So they get together, then they identified a banker, an attorney, and an audit firm to work with them, to work through the initial process, they come up with a dollar amount, they identify who they want to raise through the counsel of the banker, that process, you know, beginning to end, probably it takes about two months, maybe two and a half months, sometimes sooner, but that's the approximate range. They raise the capital, a hundred million, 200 million, 300 million, and then they start the process. They have, the vehicles usually have 18 to 24 months to complete the transaction. If it doesn't get completed in that timeframe, the capital that was raised gets returned to the investors. So they do have a clock that they have to work on and during that period of time, they go out into market and try to identify the right target, that they wanna invest in and that wants to de-SPAC and reverse into this company and become the new public company during the process. And that usually, doesn't have a set timeframe because it could take, you know, four or five months, or it could take a year, to get to that point and figure it out. Deal gets announced and then there's a process to go through a registration statement filings with the SEC, and then ultimately once the de-SPAC process occurs, then the, that operating company that was being targeted becomes the new public company, that goes forward and changes their ticker symbol and runs the operations from there. The board, which I didn't mention initially, there's a board that's set up with the sponsor is when the initial offering happens, that carries over, but there's sometimes there's transition planning and things of that sort, after the de-SPAC happens, some board member stay, some don't in where the new operating company goes. That's the short, that's a really short summary of the process, at a high level. Bankers obviously helping the sponsors raise the capital, attorneys are working with the sponsors on various elements of, you know, structuring agreements, working through the legal and regulatory issues around initial filing, and the audit firm, which is us, we do the audit work around the sponsor company audit that's needed for the initial offering. Sometimes we'll do the audit work for the operating company. The accounting firms also help, if they can't, they can't do both there's independence issues, but they could help on financial reporting. They can help on due diligence, they can help on tax structuring. It's a fairly complicated process, and involves multiple parties to get to the ultimate execution of the operating company going public.
Definitely. so what kind of considerations should that operating company be thinking about when it's time to de-SPAC? You were just talking about de-SPACing, but what should they consider?
You know it's a big, big change for these operating companies to, go from a private reporting environment, to a public reporting environment and I think there's a lot of things they should be considering, you know, from various elements of the business, marketing timing considerations, you know, when should they be getting ready? How quickly can they be ready? If the de-SPAC happens in a short period of time, will they have the right infrastructure in place, financial reporting considerations, right? Like what type of people do they have, processes? Do they have the right technology to be a public company? The reporting timelines are dramatically different, so they need to be thinking about that. Internal control considerations. Do they have the right control processes and, you know, do they need to evaluate anything from an accounting standpoint, as well as an operational standpoint, because there's just greater consequences to getting things wrong obviously when you're a public company with shorter timeframes to get things finalized. I think corporate governance and committee considerations are super important. Do they have the right board members? Do they have the right committees? Have they set up the right audit committee to work through, you know, all things that are critical when you become a public company is something they should be thinking about. And then ultimately just an operational standpoint, have they set themselves up as well to manage through a transition like this that's going to have sort of, you know, regular evaluation over their earnings and reporting and obviously that the information their flowing to the public is, has got a high degree of quality and accuracy as well. So there's, you know, from a governance standpoint, I think there's a lot of considerations from a control standpoint. There's considerations as well, although some of those may have existed already and then, you know, financial reporting and controls are, I think, extremely critical because I think those are the biggest leaps in transitions for a company that's private to go public in a short period of time.
So how can that same operating company avoid financial reporting risks?
I think, you know, when, before they think about going public, I think they really need to sit down and have a clear plan on, you know, what does the timing look like for the financial reporting needs of a public company. You know, so if they have to do 10-Qs, they have to do a 10-K, a proxy, all those things need to go out within set timeline. What is their financial reporting department look like? Do they have adequate resources, to be able to report? Do they have the right cutoffs and things of that sort so that they can have a financial report close process that could manage through that? And then I think while they're working through that, I think they also need to evaluate some of the complexities that go with being a public company which includes, you know, if their domestic or international, or whether in the GAAP standards, IFRS standards, public company disclosure requirements, you know, which include issues related to identification predecessor entity, form accountant and financial statements, just various things that need to go into a 10-K or 10-Q that they may not have to include before. There's a various gap that may be different from them being a public company to a private company. Application of certain gap that just applies to jus public business entities like earnings per share, segment disclosures, you know, other disclosure requirements, and just various assessments I think as well. There's also considerations with respect to certain things having different timelines for private companies and public companies with regards to accounting standards. So a private company, it may be due two or three years later, for them to adopt it, for public companies sooner. So really having a detailed plan walking through all this I think is extremely important for these operating companies, because I think they'll face a lot of new challenges from a financial reporting standpoint or, you know, just differences that they have in their current structure.
That makes complete sense. You briefly mentioned the board earlier when we were talking about the roles, but what role does the board play during a SPAC?
Yeah, that's a great question and I think that's a big consideration for the sponsors early on in the process and I think, you know, when they're working through evaluating who the right board members are, I think there really needs to be a thought on their skill sets, experience, industry knowledge, have they dealt and been on public company boards before and, you know, evaluating all those skillsets, I think is extremely important and making sure that aligns with the strategic approach of the SPAC. So I think there's a balance of operational focus with strategic oversight, and needing some experience with the SEC, with the PCOB and frankly, I think there's also a lot of value in having, you know, board members that, and obviously the vehicle has gained its momentum and, you know, the period of time it's been around is long but the number of people that have had experience with it is probably within the last few years, but getting board members that maybe have some experience with the SPAC process and de-SPAC process, I think all those things can be extremely valuable with the board and because I think there's just challenges that you run into and, you know, whether it's obviously initially raising the money, compensation structure is identifying the operating companies and whether they have the right, you know, infrastructure. So a lot of that, you know, guidance is important and experience is important from a board perspective and balancing, you know, different types of experience to help the SPAC and that de-SPAC process of course.
Definitely. Now when you think about all the volume of SPACs that are coming into the market, what kind of pressure do you think it's going to feel?
Yeah, it's an interesting point, right? Cause I think when you originally asked me about the vehicle and is it something that's still viable. I think, there's no doubt that it's viable and it's going to continue being used, but I think we will see how this market plays out once you start seeing the 18 and 24 month windows start expiring and how many of the SPACs actually execute their plan to de-SPAC with an operating company and with the volume of activity that we had between last year and this year, I think there's, I don't know where the last count is, but there's at least over 400 I think out there right now chasing operating companies and I don't know how many filings are with the SEC right now. It could be in the hundreds. There's going to be a significant amount of SPACs that have capital that need to be deployed. And, I think that saturates the market with capital that needs to go to work and the question is, you know, are, you know, are there enough companies out there that are ready to go public and have the right business model and maturity to be a public company? You know, that's a big question. You know, you're seeing some of these SPACs starting to focus on foreign entities, because maybe it doesn't have the same level of saturation as the domestic markets do. So I think you may see some refocus there. You know, I think if you look at the second quarter there was definitely an uptick in that part of the market. So there's, I think it'll be very interesting and I think that's one of the challenges the market may face is, are there enough companies that can actually be public companies and ready to be public companies for the amount of SPACs that exist in the capital and I think that's gonna put a little pressure on the system and something to watch over the next, you know, 6 to 12 months.
So speaking of the next 6 to 12 months, you know, as we wrap up our conversation, what's kind of the outlook for SPACs for the rest of 2021 into 2022.
You know, I think, in all my conversations and from what I'm seeing in the marketplace, I think these vehicles are here for that timeframe. At least I think they'll probably, you know, continue to be around after that. The conversations I have with sort of the market makers, everyone views them as a viable vehicle. So I think there's still strength in, you know, the approach that they're taking. Obviously the regulatory environment may shift some of that and change some of the direction. We're seeing an increase in activity now and we actually expect based on the conversations we're having and the dealings with our sponsors that I think, you know, September, October, November timeframe, we'll probably see a bit of an uptick just cause, you know, there seems to be interest in the marketplace to start, you know, raising capital at a higher level and if some of the, it seems like there there's an intention to develop warrant instruments with equity characteristics so that could simplify some of the accounting there. So I think you're going to continue seeing momentum in this space. I think, I don't think that there's going to be, I don't think you're gonna have the same pace you had at the beginning of the year. I think it's hard to do that, but I do think you'll have a steady pace and you'll see this vehicle here next year as well and, I think it just, it seems to have found a part of the market that that's very receptive to it and feels it could really be effective in deploying capital.
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