SPECIAL PURPOSE ACQUISITION COMPANIES – ACCOUNTING AND TAX ISSUES
Mohan R Lavi Chartered Accountant
Special Purpose Acquisition Companies (SPACs) have become a rage in the United States and some other countries over the past few months. SPACs have a number of unique features – they have a limited shelf-life as they are in business only for a few years, they have no object other than acquiring a target company and they do not have too much in common with other corporates in terms of assets, liabilities, employees, etc. SEBI is considering issuing guidelines on how SPACs should operate in India. This article summarises the accounting and tax issues that SPACs could encounter here.
INTRODUCTION SPACs. The word does not sound very exciting but it is a phenomenon that is taking stock markets (at least in the USA) by storm. The abbreviation expands as Special Purpose Acquisition Companies but a more street-sounding name is ‘blank cheque companies’. These are companies that are set up with next to nothing and list on the stock exchanges only for the purpose of raising capital for acquisitions. In India, SEBI is planning to come out with a framework on SPACs ostensibly to facilitate Startups to list on the exchanges. SPACs are usually formed by private equity funds or financial institutions, with expertise in a particular industry or business sector, with investment for initial working capital and issue-related expenses.
Private companies would benefit from SPACs as they go on to become listed entities without going through the rigours of an Initial Public Offering (IPO). It is not that SPACs is a new phenomenon – the concept of reverse mergers resembles a SPAC in many respects. SPACs are different from normal companies in that they have only one object – to list on the exchanges with the sole intention of acquiring a target company. One of the main advantages of a SPAC is the fact that it can use forward-looking information in the prospectus – this may not be permitted in a usual IPO.
In case the SPAC is not able to identify and acquire a target company within the set time frame it winds up and the funds are returned to the investors. In case the SPAC identifies a target company and enters into a Business Combination, the shareholders of the SPAC will have the opportunity to redeem their shares and, in many cases, vote on the initial Business Combination transaction. Each SPAC shareholder can either remain a shareholder of the company after the initial Business Combination or redeem and receive its pro rata amount of the funds held in the escrow account.
Investors in a SPAC put in a small amount of money for a stake in the company (usually around 20%). They get allotted shares with a lock-in period of up to a year. They have the option of exiting once the lock-in period is over. SPACs would also have similarities with Cat-1 alternate investment funds (AIF’s) – an angel fund listing on the SME platform.
THREE STAGES Usually, a SPAC will have three phases with diff