By Gustave Passanante, partner, The Basile Law Firm
A publicly-traded company makes for a powerful SPAC acquisition candidate. Typically, a SPAC will target a private company. A conventional IPO process could take the target company more than a year, while the route to a public offering using a SPAC may take a mere few months.
There are a few key factors the SPAC will often look at when evaluating a target company: A strong management team, financial systems and reporting in place, corporate governance familiarity and alignment, a mature company lifecycle, and growth opportunities.
A strong management team and prior relevant experience makes for a more attractive SPAC target. A strong, experienced CFO is necessary to implement and meet the financial and reporting requirements of a publicly traded company. A mature company lifecycle is reflected in a company’s history of healthy growth coupled with plans for a sustainable future. Ultimately and arguably the most important factor, is the potential growth of the target company. The success of a SPAC transaction will depend on the growth of the acquired company.
Lastly, one of the biggest hurdles when consummating a merger for any public company is the registration statement that needs to be filed with the SEC on Form S-4. This form is required to disclose material information with respect to a merger or acquisition upon the registration of a company’s securities. It consists of information regarding the terms of the transaction, risk factors, ratios, pro-forma financial information, and material contracts with the company being acquired.
Most importantly, in order to file Form S-4 both companies need two years’ worth of audited financials. This poses a problem for private companies targeted by SPACs because they need to undergo the audit process and incur additional expenses. This could make the transaction more time-consuming and more expensive. Thus, if a company is audited, it significantly enhances the likelihood of the completion of the transaction because it decreases time and costs.
With these key factors in mind, what kind of company seems like a perfect fit? That’s right, a publicly traded company.
An OTC company can always become the target of a SPAC through the traditional process where the sponsors take a liking to a company, the sponsors target the company, they begin due diligence and, eventually, close the deal. Of course, the chances of this are rather slim simply because the number of OTC companies far outweigh the number of SPACs looking for targets. Luckily, this isn’t the only way an OTC company can merge with a SPAC.
Another route for a company to merge with a SPAC is by a company stepping into the shoes of the sponsor where it will appoint independent leadership for the SPAC. The SPAC then targets the OTC company for a business combination.
While a merger with a SPAC may cost more than an up-listing, it will likely be quicker and decrease the chances of a company getting delisted for failing to meet certain exchange requirements. The entire process can take a few months, risk is minimized, and the potential benefits that come with becoming listed on a national exchange are tenfold. With a typical reverse merger, a lot of due diligence is required to combat potential liabilities.
It ends with an OTC company landing itself on the Nasdaq. Since the sponsor-and-target company already have experience being on the OTC markets, management will be prepared to handle the demanding regulatory and compliance requirements that go along with being a public company.
OTC to Nasdaq
OTC companies are commonly smaller companies which makes it difficult to meet the listing requirements of national exchanges. Investors face greater risk when investing in more speculative OTC securities. Further, stocks trading on OTC markets are, generally, not known for their large volume of trades, therefore the OTC marketplace is an alternative for small companies or those who would have trouble listing on national exchanges due to their financial capabilities.
Still, it’s possible to outgrow the OTC. The quicker the process, the better. For example, stocks listed on the Nasdaq experience less volatility, tighter spreads, and more depth. Tighter spreads and more depth at the inside quote decrease costs to investors. In addition to tighter spreads making it cheaper to trade, this also makes it easier for investors to get larger trades done.
The familiar risks associated with SPAC mergers and the obvious inexperience of a private target company seemingly melt away when the sponsor-and-target is an established, publicly traded company. This method provides microcap companies another option to grow. The popularity and use of SPACs will continue to find success as faster merger speeds benefit companies involved in this type of transaction.
Gustave “Gus” Passanante is a partner at the Basile Law Firm. He specializes in corporate restructuring, complex commercial litigation, and mergers and acquisitions to achieve practical outcomes for clients. Gus is recognized for his work as an entrepreneur, advisor, and litigator to best counsel companies at all stages.
The Basile Law Firm, P.C. provides a range of legal services for their OTC clients including debt remediation, restructuring, corporate finance litigation, shareholder derivative actions, corporate dispute resolution, and mergers and acquisitions. Founded by Mark Basile, former CEO of several OTC companies, the Basile Law Firm, P.C. offers clients a unique legal perspective and thorough understanding of how to achieve their goals.