What Are The Risks Of SPAC And How To Avoid Them?

Due to the extra funds private equity and venture capital companies need to invest, the emergence of Special purpose acquisition company (SPAC) vehicles has increased over the last year. 

 

An SPAC is a shell organization created for the express aim of obtaining money via an initial public offering (IPO) in order to subsequently buy a target company. It has no track record of success and generates no income.

 

These firms often need to make major balance sheet adjustments within their first few months as public companies and must disclose publicly if their external auditors find severe flaws in their internal controls over financial reporting.

 

Many different factors can go wrong while establishing and managing an SPAC. However, professional pre-IPO advisory and accounting services in Malaysia allow you to avoid most of these issues by implementing suitable strategies. 
 
The purpose of this article is to discuss the major risks of SPAC and what steps you can take to avoid them. 

 

Warrants

Warrants are substitutes for the mother’s shares and are traded for less money. Warrant prices often fluctuate in sync with mother share prices. 

 

If the transaction is successful, the warrants may continue to be traded on the market and have the opportunity to be converted into mother shares. If an agreement cannot be made, there is a possibility that the warrants will expire worthlessly.

 

A set of warrants is offered to early investors in an IPO. The price of the warrant and shares will rise as time goes on and news of transactions reaches investors. At this moment, there will be a strong urge to join the group. 

 

You run the danger of being caught in the speculative surge if you enter the warrant at a high price on speculation. You will be left with a costly warrant if the sale goes through. Your only remaining choice at this stage may be to cut and accept a loss.

 
group of business people in the meeting

Merger Quality

Deals are not always good just because they are completed. An SPAC may become a full-fledged public listed company if a transaction is completed. The most frequent complaint about SPAC is that the sponsors prioritize the deal’s chances while disregarding its quality. 

 

Due to their post-merger share vesting, sponsors often walk away with a windfall. The goal of mergers should be to benefit all parties, but in reality, there is always room for doubt.

 

Moreover, keep in mind that the failure of SPAC can affect investors unequally. This does not imply that the SPAC teams driving unsuccessful agreements lacked thoroughness. 

 

However, because of how SPACs are set up, their team members—known as sponsors—are unlikely to suffer if that occurs. Their tiny investors are often disproportionately impacted.

 

Goodwill

The amount that appears on the balance sheet after a business’s book value is deducted from the higher purchase price is referred to as goodwill in accounting. Some De-SPAC deals show astronomically large goodwill allocations. 

 

For public firms, different goodwill accounting standards (ASC 350) apply. Companies may choose to amortize goodwill under private company GAAP, and they may also consider a future goodwill impairment test to be a triggering event.

 

Lease Accounting

The standard makes a substantial shift by requiring that the entire extent of a company’s long-term lease commitments be stated on balance sheets. The main issues for businesses are twofold: the new standard will be adopted more quickly and sooner than anticipated, and private organizations will no longer have access to certain policy alternatives.

Comparable Valuation-1

Keeping Up with the Innovations

Companies must be able to swiftly and accurately prepare financial reports that can withstand intense SEC inspection as well as public scrutiny. 

 

Many of the target companies may not necessarily be sophisticated enough to keep up with the speed of a public corporation. There will be a lot of demands on people, processes, and technology. 

 

There will be changes to procedures. Most likely, you’ll need to increase the number of your personnel. 

 

If the organizations rely on professional accounting services in Malaysia, they will be in a very good position to avoid these SPAC risks and rely on experts for pre-IPO advisory services. 

 

Conclusion

In the last two years, SPACs have emerged as one of the most intriguing investment vehicles. Nevertheless, it is highly important to understand everything about SPAC and its risks before you jump into it. Try to avoid the hype and be aware of what you are getting into. 

 

Don’t take chances to get rash, rapid returns. If you want to enjoy sustainable growth and profits, you should rely on professional accounting services in Malaysia to benefit from pre-IPO advisory and make smart decisions through the process of establishing and managing SPAC.