Over the past year, the Securities and Exchange Commission issued a series of announcements seemingly designed to cool down the red-hot market for special purpose acquisition companies, or SPACs. But the recent announcement of Buzzfeed’s agreement to go public via a SPAC merger is but another indicator that the SPAC train will roll on despite the intervention of regulators and other obstacles.
A SPAC is a shell company with no operations that publicly offers and sells securities. SPACs then acquire private operating companies (a “de-SPAC transaction”), allowing them to avoid the traditional IPO process. The sponsors of the SPAC receive a “promote,” which is greater equity than their cash commitment would otherwise imply.
Oftentimes, the consummation of the intended business combination with the target operating company is subject to the SPAC raising additional cash through a simultaneous private offering of securities to institutional investors (a “PIPE” financing).
Beginning in December 2020, the SEC issued a series of investor alerts, disclosure guidance and public statements highlighting various potential issues with SPACs and their related disclosure, financial reporting, and auditing considerations and obligations. These staff statements were consistent with the traditional SEC practice of highlighting particular issues and guiding market participants to appropriately address those issues in order to improve the quality of disclosures and ensure appropriate governance and financial controls. However, the SEC soon upped the pressure.
On April 8, the acting director of the SEC’s Division of Corporate Finance issued a public statement questioning SPAC market participants’ use of the forward-looking statement safe harbor in securities law as a defining advantage of the SPAC process. The SEC highlighted both the potential limitations of the protections of the safe harbor and then questioned whether the safe harbor is even available at all in de-SPAC transactions.
Later that month the acting director issued another public statement, this time questioning the accounting of warrants issued as part of the SPAC IPO process.
Each of these moves was thought to have an immediate impact in cooling down the SPAC market. Fast forward to today, and it appears that this temporary disruption may have had little impact.
Buzzfeed simultaneously announced a merger with SPAC partner 890 5th Avenue Partners, a deal to acquire Complex Networks, a global entertainment company focused on millennials and Gen Z, and a $150 million PIPE. The Complex Networks purchase price of $300 million will be financed with $200 million in cash and $100 million in combined SPAC-Buzzfeed public equity. The intended use of Buzzfeed’s newly public equity as acquisition currency demonstrates another value a SPAC can deliver with its public listing.
This transaction was possible despite challenges the SPAC faced in the wake of the new SEC guidance. 890 5th Avenue Partners recently announced that it was unable to timely file its quarterly financial statements as it assessed the SEC’s April 2021 statement questioning the appropriate accounting for SPAC warrants.
Upon further review, the SPAC determined that the warrants had been misclassified in its prior financial statements. However, that misclassification was viewed as not material to the company’s balance sheet, and the misstatement had no material impact to any prior period. In this instance, the SEC’s warrant guidance served as a speedbump to slow down the SPAC a bit but not seriously impede its operations.
Buzzfeed is positioning itself as the preferred consolidator of digital media companies attempting to compete against the triopoly of Facebook, Google and Amazon that dominate the digital advertising marketplace.
The company has been around for 15 years. During that time, it has engaged in many financing rounds and counts as its backers numerous marquee investment entities and industry players. It announced the acquisition of HuffPost from Verizon Media last year, and the deal for Complex Networks is another piece of its consolidation strategy.
One can only imagine that Buzzfeed had other funding options given its well-heeled backers. Yet despite the SEC’s recent actions and other obstacles arising in the market, Buzzfeed’s announcement illustrates that SPAC transactions remain a viable and attractive vehicle to access the public market and pursue business objectives.
Jack Steele, a partner at Hinckley Allen in Boston, is a corporate lawyer whose expertise covers the areas of venture capital financing, private equity, technology transactions and capital markets.