Structuring Advisory Share Issuances In DE-SPAC Transactions: Accounting Goals Vs. Securities Law Reality

In advising SPAC and de-SPAC transactions, we are increasingly encountering a recurring, and often misunderstood, issue: how to structure equity compensation for advisors, particularly where those advisors are expected to assist with financing efforts, and whether those shares can be freely tradable immediately following a public listing. This issue sits at the intersection of accounting treatment, SEC disclosure, and securities law risk. If not carefully addressed, it can create internal inconsistencies that expose companies to regulatory scrutiny or frustrate the commercial expectations of key stakeholders.

A common scenario arises where a company, in connection with a de-SPAC transaction, intends to issue a significant number of shares to an advisor who is expected to introduce future financing opportunities. The company’s objectives are typically twofold: to achieve favorable accounting treatment, such as avoiding a large expense on its income statement, and to provide immediate liquidity to the advisor by ensuring that the shares are freely tradable upon listing. While these objectives may appear achievable through careful structuring, they are often fundamentally in tension.

From an accounting perspective, companies may seek to characterize such arrangements as “IPO financing advisory agreements,” with the goal of recording the share issuance as additional paid-in capital rather than as an expense. However, this characterization does not control the analysis under U.S. securities laws. The SEC applies a substance-over-form approach, focusing on what the advisor is actually doing rather than how the arrangement is labeled. Where an advisor is involved in introducing investors, assisting with capital raising, or receiving compensation tied to financing success, the SEC may view that advisor as participating in the distribution of securities.

This leads to the central legal risk in these structures: whether the advisor may be deemed an “underwriter.” Under the Securities Act of 1933, the definition of underwriter is broad and extends beyond traditional investment banks to include any person who participates, directly or indirectly, in a distribution of securities. As a result, even informal roles—such as facilitating investor introductions or assisting with financing efforts—can give rise to underwriter characterization.

The implications of underwriter status are significant. Even where shares are registered for resale, for example through a resale prospectus in a Form F-4, underwriters may not be able to freely sell those shares in the same manner as ordinary investors. In addition, they cannot rely on Rule 144 for resale, and they are subject to heightened liability under the Securities Act, including potential exposure under Sections 11 and 12. These constraints often conflict directly with the expectation of immediate liquidity.

A related misconception is that reducing the size of the equity grant, such as staying below a five percent ownership threshold, can facilitate resale. In reality, this threshold is generally relevant for reporting obligations under Section 13 of the Exchange Act, but it does not determine resale eligibility. The key considerations remain whether the shares are registered and whether the holder is deemed to be an underwriter or otherwise participating in a distribution.

For shares to be freely tradable upon listing, two conditions must be satisfied. First, the shares must be properly registered, typically through inclusion in a resale prospectus and identification of the advisor as a selling securityholder. Second, and more critically, the holder must not be characterized as an underwriter. Even a well-drafted registration statement will not achieve the intended liquidity outcome if the advisor is viewed as participating in the distribution.

Another area of confusion relates to lock-up arrangements in SPAC transactions. Lock-ups are not imposed by SEC rules; rather, they are contractual restrictions negotiated as part of the transaction. While registered shares may, in theory, be freely tradable, lock-up agreements commonly restrict sales for a defined period following closing. Importantly, even in the absence of a lock-up, resale may still be constrained if the holder is deemed to be an underwriter.

These considerations highlight a structural tension inherent in many advisory compensation arrangements. Structuring an advisor’s role as a financing or IPO advisor may support favorable accounting treatment, but it increases the risk of underwriter characterization. Conversely, framing the advisor’s role as strategic or business-focused may reduce securities law risk, but may result in less favorable accounting treatment. In practice, it is difficult to achieve both objectives simultaneously without careful structuring.

In navigating this tension, companies may consider alternative approaches, such as clearly defining advisory services in terms of business development or strategic support, avoiding compensation structures tied directly to financing success, and, where appropriate, separating financing-related services from equity-based compensation. In some cases, hybrid structures may be used, but these require careful drafting and close coordination between legal and accounting teams.

Where resale is intended, particular attention should be given to disclosure in the Form F-4. This includes properly identifying the advisor in the selling securityholders section, ensuring that the plan of distribution is accurately described, and carefully drafting risk factors and narrative disclosure. Descriptions of the advisor’s role should be consistent and should avoid language that suggests participation in capital raising activities, unless such risks are fully addressed.

Certain factors may attract heightened scrutiny from the SEC, including large equity grants, compensation tied to financing outcomes, expectations of immediate resale, and inconsistencies in how advisory services are described across documents. These issues should be carefully evaluated early in the structuring process.

Ultimately, advisory share issuances in de-SPAC transactions require careful alignment of legal, accounting, and commercial objectives. Companies should recognize that accounting characterization does not determine securities law outcomes, that underwriter status remains the central legal risk, and that there is an inherent trade-off between favorable accounting treatment and immediate liquidity. A thoughtful, coordinated approach is essential to managing these competing considerations effectively.

If you have questions about resale registration, or de-SPAC transaction mechanics, our team would be happy to assist.

 Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.