Enzolytics Inc (ENZC)

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SPAC Transactions —
Considerations for
Target-Company CFOs

Introduction
A SPAC is a newly created public company that uses a combination of IPO proceeds and additional financing (PIPEs
have been common in recent times) to fund the acquisition of a private operating company. The proceeds raised
in the IPO are placed in a trust account while the SPAC’s management team seeks to complete an acquisition of an
existing operating company (target), generally in a specific industry or geography, within the period stated in the
SPAC’s governing documents (typically, 18 to 24 months). If the SPAC successfully completes an acquisition, the private
operating company target succeeds to the SPAC’s public filing status and, as a result, the target effectively becomes a
public company. If the SPAC is unable to complete an acquisition in the allotted timeframe, the cash held in its trust
account is returned to its investors unless the SPAC extends its timeline via a proxy process.

Benefits and Downsides of a SPAC
A SPAC transaction may offer target companies several benefits. First, a SPAC acquisition allows a private company
target that is otherwise prepared for an IPO and reporting as a public company to effectively go public without making
arrangements with underwriters, conducting roadshows, or preparing a prospectus to sell its securities to the public.
Second, a target is able to privately negotiate a fixed valuation with the acquirer by setting a fixed dollar “purchase
price” that is usually greater than what an operating company could or would offer. Since such a valuation is “locked in”
at the time a merger agreement is executed and announced (and often a PIPE is set to close concurrently), the target
can avoid the potential hit to valuation that is associated with the pricing in traditional IPOs during a difficult time in
the public markets. Third, a SPAC acquisition will typically provide significant cash liquidity for a target’s stockholders by
giving them access to public markets, even during periods of market instability. Fourth, SPAC transactions often present
an opportunity for companies to simplify deal terms by using a public-company-style acquisition approach based on an
enterprise value without negotiating working capital, cash, debt, or transaction expense adjustments.

On the other hand, a SPAC acquisition may require an extended timeline given the hybrid “M&A/IPO” nature of the
transaction and run up extensive transaction costs. In the process, targets may need to negotiate a definitive acquisition
agreement and related M&A agreements alongside preparation of the Form S-4, financial statements, and other public
filings, which may require extensive company attention and resources. And even if all documents are negotiated
successfully, the rights of SPAC shareholders to redeem their shares and receive their pro rata portions of the IPO
proceeds may lead to a substantial amount of uncertainty about the amount of capital the SPAC will have at closing.
In addition, promoter equity will be dilutive to the private company stockholders. SPAC promoters and the operating
company will also have to sell the deal to current private stockholders, public stockholders, and PIPE investors to
implement a capital structure that is aligned with the company’s profile and plans.

Spotlight on Financial Reporting

Although the amount of time between the deal announcement and the deal closing can vary greatly on the basis
of the readiness of the operating company, it can be as short as four to six months.

The financial reporting requirements for a target in a SPAC merger are voluminous and must be completed
in a compressed SPAC merger timeline leading up to the Form S-4/proxy statement filing. The reporting
requirements include preparation of the following:
• Annual financial statements for the required periods in compliance with public company GAAP and SEC
rules and audited under PCAOB standards. Entities may be required to provide three years of annual
historical financial statements in certain circumstances.
• Interim financial statements for required periods.
• Pro forma financial information.
• MD&A and market risk disclosures.
• Other nonfinancial information for a Form S-4/proxy statement and a special Form 8-K (“Super 8-K”).
Furthermore, to meet these requirements, an entity should have a deep understanding of complex accounting
and SEC reporting rules and regulations in order to:
• Determine the historical periods for which target company financial statements are needed in the Form
S-4/proxy statement, while giving consideration to staleness dates.
• Apply public company accounting standards and public company adoption dates for new standards, if
required, and reflect their impact on the entity’s financial statements.
• Determine the “acquirer” for financial reporting purposes.
• Determine the impact of historical acquisitions and dispositions, which may involve additional financial
reporting requirements, and consider potential consultation with the SEC.
• Successfully respond to SEC comments.

Form S-4/Proxy Statement Liability
As with an S-1 registration statement in a traditional IPO, it is important that the SPAC and the target company
provide complete and accurate disclosures to investors in the Form S-4/proxy statement, with no material
misstatements or omissions of material fact. The Form S-4/proxy statement will be subject to extensive review
by the SEC and would be reviewed by the plaintiff’s firms in any potential claims based on inadequate disclosure.

Acquisition Close
If an affirmative vote is obtained from the proxy process, the target acquisition can close by merging into the SPAC, and
the target company becomes a publicly traded entity. A Super 8-K must be filed within four days of the acquisition and
must contain substantially the same information that would be required in a registration statement for companies that
go through a traditional IPO. Further, the sponsor’s founders’ shares and warrants are locked up for a specified period
(the “lock-up period”) starting from the date of the Super 8-K filing. The lock-up period is typically one year, subject to
negotiation at the inception of the SPAC, but the agreement may include exceptions for gifts, transfers to affiliates or
trusts, or estate planning. Some or all of the target’s securityholders will also be expected to sign a lock-up agreement,
which is typically 180 days from the closing of the merger.


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