WASHINGTON – Some specialty acquisition companies have falsely accounted for warrants sold or given to investors, securities regulators said Monday, as they intensified scrutiny of the popular vehicles.
Warrants are standard part of the way SPACs raise money, including from hedge funds and other private investors. The potential returns for early investors in SPACs are huge as the company’s stock rises due to several features of the structure, including warrants that give some investors the right to buy more shares in the future at a preset price.
SPACs are blank check companies that raise money from the public for the purpose of buying a business and making it public. When the deal takes place, the target company takes the place of the SPAC on an exchange, in a transaction similar to an IPO. SPACs have grown tremendously over the past year as many deal makers rushed to launch them and capitalize on investors’ hunger for the structure.
SPACs have typically classified the warrants on their balance sheet as equity. Under certain circumstances, they should be classified as liabilities, requiring the company to periodically account for changes in the value of the warrants, the Securities and Exchange Commission said in a statement released late Monday. One impact of the SEC’s announcement: Affected SPACs should restate their financial results if the fluctuations are considered material, the SEC said.
The Wall Street watchdog has begun to scrutinize the market more closely as SPACs grew rapidly this year, bringing in nearly $ 100 billion. A senior SEC official said last week that SPACs may not have legal advantages over the standard public offering, indicating that the agency would investigate the shortcomings in the same way as IPOs.