The extent of the Securities and Exchange Commission's crackdown on special-purpose acquisition companies became evident last October in a deal involving a SPAC formed by Sand Hill Partners that wanted to acquire St. Bernard Software, a computer-security firm.
Having formed a new unit devoted to reviewing SPAC deals, the SEC, according to St. Bernard CEO John Jones, "asked lots more questions than we expected." The commission did more than that: it also required St. Bernard to treat the warrants issued by the SPAC when it went public as St. Bernard's debt rather than equity. That requirement was designed to prevent shareholder equity from being inflated by such securities, which are frequently issued in connection with stock when a SPAC goes public.
The warrant requirement was especially surprising, according to St. Bernard CFO Alfred Riedler. "Among the accountants and attorneys we dealt with," he says, "no one was aware of the SEC not allowing a stock to be registered when it was in conjunction with a warrant already traded."
The added SEC scrutiny aimed at the kind of abuse that has plagued certain deals. In some cases, the private investors that sponsor the initial public offering of the SPAC ended up making no acquisition despite promising to do so within a specified period. Although the proceeds of the SPAC offering must then be returned to public investors, they enjoy no use of the funds during the interim, and only rarely do they recover the hefty investment-bank fees that are part and parcel of an IPO.
Despite the SEC's concern, the deal for St. Bernard eventually succeeded, providing the company with a $21.5 million infusion. And while the nine months the deal required was longer than anyone expected, Jones says that going the SPAC route required less time and energy than a traditional IPO would have. If the SEC is now satisfied with the way SPACs are operating, they may become a more viable alternative for companies, particularly those for which, like St. Bernard, neither venture-capital nor private-equity funding makes sense. — Ronald Fink
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