One cannot look at financial and business news lately without seeing one or more articles on SPACs (special purpose acquisition company). Not wanting to miss-out on the trend, today I will note two SPAC issues relevant to executive and equity compensation professionals.
SEC Staff Statement
On March 31, the SEC Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies to “addresses certain accounting, financial reporting and governance issues” that a private operating company should carefully consider before it undertakes a business combination with a SPAC. Regarding executive and equity compensation, the combined company:
Will not be eligible to use Form S-8 for the registration of compensatory securities offerings until at least 60 calendar days after the combined company has filed current Form 10 information; and
Must meet qualitative standards regarding corporate governance, such as NYSE or Nasdaq requirements regarding a majority independent board of directors, an independent audit committee consisting of directors with specialized experience, independent director oversight of executive compensation and the director nomination process, and a code of conduct applicable to all directors, officers, and employees. “There is a risk that a private operating company that has not prepared for an initial public offering and is quickly acquired by a SPAC may not have these elements in place in order to meet the listing standards at the time required. Advance planning may be necessary to identify, elect, and on-board a newly-constituted independent board and audit committee, and for them to adequately oversee the preparation and audit of the company’s financial statements, books and records, and internal controls.”
The statement makes clear that it only represents the views of the staff of the Division of Corporation Finance, it is not a rule, regulation, or statement of the SEC, and it has no legal force or effect.
Do Pledged Securities in SPACs Pose a Double Risk?
Earlier in March, I had spotted an interesting article titled Pledged Securities in SPACs Pose Double Risk in the Weekly Blog Recap of Audit Analytics. The article’s reasoning was as follows:
As we have discussed, pledged securities present risks to corporate governance and share price. These are compounded for SPAC investors relying on the credibility SPAC sponsors and beneficial owners lend to already risky ventures. When these key investors pledge their ownership in a SPAC in exchange for financing, the risk associated with the SPAC investment is transferred to a financial institution.
While there is always a risk for securities to be sold once pledged as collateral, the risk is heightened for securities pledged from a SPAC investment. SPAC sponsors usually make money by acquiring a percentage of the newly formed public company through the beneficial ownership of company shares. Pledged SPAC shares carry an increased risk of being exposed as unmet margin calls, as SPAC investments are often subject to share price volatility and are not guaranteed to be successful in the public market.
If pledged shares for a SPAC investment are exposed as unmet margin calls, it could lead to a change in ownership and control, impacting sustainability and future prospects as a public company, regardless of operational success.
As I have written before, more than a dozen times on the risks of pledging of company shares by officers and directors (see, for example, Company Stock Pledging Gone Wrong and Shareholder Lawsuit Over “Excessive” Stock Pledging) and I also have argued that the risks of limited pledging of shares is acceptable. However, I have not had enough experience with the pledging of shares by officers and directors of a SPAC to have a feel for whether this is really a significantly greater risk. If any reader has this experience, I would love to hear about it and, if said reader is okay with it, post his or her thoughts.
-Mike Melbinger, CompensationStandards.com April 6, 2021
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