Ep. 137: Demetrios Frangiskatos - SPAC Market and Considerations

Contact Demetrios Frangiskatos:
https://www.linkedin.com/in/demetrios-frangiskatos-00290a7/

Demetrios at BDO:
https://www.bdo.com/our-people/demetrios-frangiskatos


FULL EPISODE TRANSCRIPTMitch (00:06):


Welcome back to Count Me In, IMA's podcast about all things
affecting the accounting and finance world. I'm your host Mitch
Roshong and this is episode 137 of our series. Today's
conversation is between my co-host Adam and the co-leader of BDOs
SPAC assurance practice, Demetrios Frangiskatos. The SPAC,
Special Purpose Acquisition Company market has long-term
implications that cannot be overlooked. Demetrios joins us to
explain factors currently driving the market as well as other
considerations and risks. To learn more, keep listening as we
head over to their conversation now.


 


Adam (00:48):


Demetrios, thanks so much for coming on the podcast today. To
start off our conversation, where's the SPAC market now and what
factors have been driving its activity and is it still a viable
option to going public today?


 


Demetrios (01:02):


Thanks for having me, Adam and looking forward to our discussion.
Yeah. You know, the SPAC market has been on a roller coaster ride
over the last probably 18 months and all of it is sort of been
going up just at different speeds and different levels. The
market right now is probably a little slower than it has been,
you know, earlier on in the year with regards to initial public
offerings and raising capital through the pipe market, but
there's been no indication from, you know, whether, the bankers,,
attorneys sponsors, what we're seeing in the marketplace that it
is still a viable option. We're still seeing activity. We're
still seeing SPACs raising money. We're still seeing spot
sponsors, which include asset managers and strategics and high
net worth individuals who have had a lot of success in doing
M&A, looking to raise capital. So I don't see it slowing
down. I think we were sort of in an unprecedented market at the
beginning of the year and that incline had started from the year
before, and that might've been a pace that was difficult to
continue following. But it still seems like it's going strong and
you're still also seeing even the traditional IPO market go
strong. So they both seem to be viable, options that are
continuing in the marketplace, as well right now.


 


Adam (02:51):


So back in April of this year, the SEC issued a new guidance
regarding, related to warrants that seemed to shake up the
market. Can you talk about what happened there and what
implications were for sponsors and target companies alike?


 


Demetrios (03:08):


Yeah, of course. Yeah, that was, that was a bit of a splash in
the market with respect to the accounting behind warrants was
dealt with in a certain way for a long period time and with the
SEC statement it changed the direction of that accounting from
what was fairly easy to account for the warrants as equity
instruments, to if the warrant instruments had certain clauses
they would have to be reclassified as liabilities. And what did
that do, that caused, you know, there was at least 400 SPACs out
in the market that raised capital, that had to reevaluate it.
That was de-SPACs that occurred in the marketplace, where the
warrants carried over from the original offering into the new
operating company that became public that had, restatements. So
it caused quite a bit of noise. And, you know, the timing was
interesting because the statement came out in April and then in
March, I shouldn't say then, but prior to that in March, we had
started seeing a little bit of a slowdown in the market. I think
the pipe market was reaching a bit of a capacity point in how
much private investment was going to go into these SPACs and the
combination of those two really, really put a pause in the
marketplace. And it took, it took about, you know, maybe a couple
of months for the market to start getting back up and going and
enough time for the companies to evaluate what the rules mean
with their current equity instruments, you know, attorneys to
evaluate the structure, including the bankers. And initially
there was a lot of hesitation and what to do, whether to file new
SPACs with, you know, the legacy terms and my ability accounting,
try to restructure these agreements so that they have equity
accounting, and that started shaking itself out and initially we
saw mostly filings of you know, saw the restatements on the old,
on the existing companies. We started seeing filings of SPACs
with, warrant instruments with liability accounting, and now
we're starting to see a shift where the sponsors and the bank
community and the attorneys are working on instruments that will,
get these warrant instruments to equity accounting and you know,
we're working through several within our firm as well, so you're
starting to see the market evolve and address some of the
concerns that the SEC presented in their statement.


 


Adam (06:06):


Can you maybe touch on the regulatory focus that continues to
increase, such as the current chair's Gensler's the statements
that he's made?


 


Demetrios (06:14):


Yeah, no, of course. I think, you know, you're going through
changes in the administration right now, because of the
presidential change so that's, we'll probably gonna see some
shifts in regulatory focus and, you know, the appointments that
are being made and coupled with, you know, Gensler's comments,
maybe a month, month and a half ago, he was talking generally
about the capital markets and there's been an uptick both in
traditional IPO's, and that there's an expectation that will
continue. But did talk about SPACs, and their sort of their
resurgence from, you know, these were vehicles that existed
several years ago, or much longer than several years ago, but
they just weren't, they weren't being used as often and obviously
now the activity is tremendous. And he was, you know, he was
focusing on our investors protected appropriately with these
SPACs specifically. I think his focus was on retail investors and
them getting the appropriate information, that they need both on
the initial IPO stage and in the de-SPAC when the target is the
operating companies identify and the DSPAC occurs and I think he
was cuing that there should be some focus on this and make sure
with the volume that's going on that the disclosures and the
information flow that's getting to investors is at the right
level. And, the second point he raised, which I think has always
been something that's been a focus is, just generally speaking
the efficiency of the vehicle and whether, you know, is how it
compares to traditional IPO. Obviously, the SPAC sponsor is the
ones that are raising the capital and are the ones that are
looking for the operating company. There's a certain level of
dilution and costs that they bring to the table. The SPACs that
we're you know, in the current market, maybe several years ago,
they didn't have pipes, but now they have pipes which are private
investments in public equity. So there's significant capital
being raised through that and that they're getting discounted
pricing. So the combination of all that is a concern that gets
brought up, are the retail investors aware and, are they
properly, being, you know, evaluating their decisions with the
information for what's going in? So it's clear that there's going
to be some heightened focus on SPACs, disclosure, the right level
of information for investors, and then ultimately I thi...