Challenges & Concerns SPAC Risks
Taking a company public through special purpose acquisition companies (SPACs) is not something that is entirely new, but there has been a dramatic increase in their popularity in the last few years.
As a result, entrepreneurs who are planning to take their company public want to learn more about SPACs. Most importantly, it is important to be familiar with the common challenges, concerns, and risks associated with SPACs.
Keep reading to learn all about them.
Overview of a SPAC
A SPAC is also known as a blank check company. It is a publicly-traded company that facilitates private companies going public through a merger or acquisition. There is a certain time frame, typically 18 months, under which the private company must combine with the SPAC.
Otherwise, the capital is returned to the investors. It is common for SPACs to fail due to a variety of challenges.
Risks and Challenges of SPACs
Following are the key risks and challenges associated with SPACs:
Fewer Returns for Investors
Recent studies and surveys related to SPAC performance have shown that the benefits are mainly available to the SPAC sponsors and founders of the acquired companies. Investors, on the other hand, receive significantly less than their original investment.
Even though SPACs are easier to form and handle than traditional initial public offering (IPO) procedures, there are still plenty of complexities involved in mergers and acquisitions.
As a result, SPAC is not like any traditional investment in which you put money in and get back more returns. This is also the reason why many people find it difficult to find investors for SPACs.
The trend of going public through SPACs increased exponentially, especially during the pandemic when people were establishing public businesses. However, the increasing failure rate of SPACs has led to a significant decline in the hype around SPACs.
It is common for SPACs to run into legal troubles, especially when paperwork is done without the help of experts like the accounting firms in Singapore.
Increasing legal troubles and scandals with different SPACs are causing investors to become more cautious about making such investments.
The legal complications of SPACs have also led to greater scrutiny from legal and regulatory bodies to make sure all the target companies are filing relevant and accurate records.
It shows that there is still a lot of room for SPAC’s paperwork and legal procedures to be improved and standardized.
Lack of Price Increase
One of the most important factors to consider about SPACs is that they cannot be upsized in the same way as conventional IPOs. It is typical for IPOs to bring a significant increase in share prices after the company goes public.
In SPACs, however, the price is negotiated in advance, so they have a lower ceiling price with a higher floor price. Therefore, it is important to properly do the research and negotiate the right price to avoid issues in the later stages.
Failure Is Possible
When companies decide to go public via SPACs, they often assume that there is no chance of failure, like in IPOs. However, this is only a myth.
In reality, there is always a risk of failure, even in SPACs, because many things can go wrong in the process. Legal liabilities, tax issues, HR problems, and acquisition challenges are some of the many things that can prevent a company from going public via SPACs.
It is important to note that public companies receive a lot of scrutiny, especially those that are transitioning from private to public.
This entire transition brings a whole new level of legal compliance requirements, disclosure requirements, and new rules that the company has to consider to keep operating as a trustworthy public company.
Keeping all of these requirements in mind, it is integral for companies to prepare in advance and make sure they are capable of meeting the standards. Experts, like the accounting firms in Singapore, can help public companies meet these requirements.
Lack of Goals
One of the most popular reasons why many SPACs fail is that they are led by inexperienced individuals.
It is important to have people who have expertise in the target company’s industry to get the desired results. Otherwise, it can cause a conflict between the SPAC sponsors and the managers of the acquired company.
All in all
There are several challenges and risks associated with SPACs. The key to mitigating these challenges is to rely on experts, such as accounting firms in Singapore, to ensure that experienced and competent professionals guide you throughout the entire process, from initial planning to taking the company public and fulfilling various disclosure requirements.